One of the big problems I consistently hear about from architecture, engineering, and design firms is that customers promise to pay, and the firm never sees a dime.
I intend to show that it is possible to reduce the length of the payment cycle by adopting effective receivables practices. In this article, I am going to first provide some suggestions for getting your receivables under control and then detail the keys to prevent them from getting out of hand in the future.
Note that all of the suggestions in this article assume you haven't retained your rights to payment through a lien. If you have done so, you don't need this article. Instead, contact your attorney immediately.
COLLECTING THOSE OLD RECEIVABLES
If you have a decent amount of receivables under 90 days, you can sell it to a factoring company for a percentage of the total price. Many factoring companies offer 90% of the total; they typically pay 75% up-front and an additional 15% when the money is collected. If you’re going to use factoring, check to make sure you’re using a reliable company that pays what it promises. You might find a company that seems to be reputable, only to find out later that their checks keep getting “lost” in the mail.
Anything past 90 days you’ll most likely have to send to collections. At best, you can expect to get 50% of the amount they collect. The general rule with collections companies is that the less money they offer you on what they collect, the more reputable they are. A company that offers 50% might just send you a check one day without any explanation as to what was collected, and you’ll have to take their word for it. A company that offers 25% might send you a report along with the check: “We collected $xxx.xx of the total $xxxx.xx on such-and-such a day through a payment plan. Enclosed is a check for 25% of $xxx.xx, which comes to $xxx.xx. Additional checks will be issued for each payment we receive.”
****IMPORTANT NOTE**** In most states, the business that hires the collections company is liable for the actions of the collections agent. Some collections organizations operate in multiple jurisdictions and do not follow all the laws in every jurisdiction. When you send something to collections, you need to ensure it’s with a company that observes the laws of the area in which you are located. If not, you could find your business being served with civil and/or criminal suits.
Payment Plans and Discounts
If you’re OK with putting in a little more time and effort, the combination of a discount and a payment plan often works wonders for finally getting those old receivables off your books.
Most businesses charge penalties for late payments. Offering to drop those penalties and break the invoice up into monthly installments is often a very effective method.
Writing Down Bad Debt
Finally, if there’s no way for you to get payment on that overdue bill, it’s time to write it off. Bad debt is tax-deductible, but you only have a small window of time to take advantage of this (generally a year from the invoice date, but consult with your accountant.)
****ANOTHER IMPORTANT NOTE**** Don’t write old invoices off just because you don’t feel like collecting them. Writing off even 0.5% (1/2 of 1%) of your total billed amount for the period in question shows that your business has a problem with collections. If it is 1% or higher, it demonstrates a serious cash flow deficiency. The average business operates at a 5% profit, which means that writing off 1% is equivalent to giving away 20% of your profits!
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Now that we’ve discussed a few ways to collect past-due receivables, I’m going to lay out some steps your firm can take to ensure that you’re getting paid sooner for what you’re billing.
Create a Policy in Writing
This is the first step. Decide what your policy is going to be for all your invoices (will it be COD, will it be due in 30 days, will there be a discount if it’s paid within 10 days, are there penalties, what types of payment are accepted, etc.) and put it down in writing. You should review and update the policy every 2 years, but the basic framework will likely remain in place for the life of your business.
Once it’s set down in writing, post it in a highly visible area that clients often see. Then, give copies to anyone who meets with clients. Make sure that everyone in the office is clear on the procedures. On a separate sheet, lay out disciplinary actions for employees who don’t follow the new rules.
Have a Plan for Collecting
After creating an invoicing policy, the next step your business needs to take is creating a policy for collecting the money you’ve billed. Will you mail an invoice when the job is completed? After? When will your company follow up on unpaid invoices? What actions will it take on unpaid invoices? These are the questions that need to be considered when you come up with your plan for collecting. It’s also helpful to put this in writing and to set up a scheduler that sends out reminders to follow up on invoices.
Email Invoices with Links for Online Payment
This is a surprisingly effective practice for receiving timely payment. I recently read an article on a study in South Africa that said adding a link for online payment reduced collections times by 6-10 days for nearly every business that was studied. In a similar article, 95% of Australian business owners who used A/R management apps that send invoices which include links to pay online said that the processes “are ‘very’ or ‘somewhat’ effective in reducing late payments.”
“He’s Not a Client. He’s a Risk.”
An old boss of mine told me this about a client who had a notorious habit of not paying, or of renegotiating invoices after he signed a contract. One of the keys to receivables management is knowing your clients. There are some that you know will always pay who occasionally need a little extra time. There are others who will never pay without a fight, even if they have the money and they’re given all the time in the world. Increasingly, small businesses are using credit checks on new clients to determine what terms will be offered. This may be a process your business needs to implement if it continually finds itself coming up short in regards to client payments.
I’ve laid out some steps to effective receivables management that I hope will be helpful for the reader. Remember that the first step is to have a receivables process in writing that is used and known to all employees. Once you have these processes in place, it should become less of a hassle to collect past-due receivables.
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