Cash flow is the lifeblood of any business enterprise. It is even more important than profit! Extending credit means taking on risk. There is no way to avoid it. In your efforts to grow your business consider what an acceptable level of bad debt would be. That’s right. Trying to avoid any bad debt will most likely actually limit your sales potential. Here’s how to reap the best of both worlds:
Step #1: Make it a habit to contact your customers as soon as their invoices are coming due. Just ask if you can receive a pay schedule. It’s totally expected and the accounts payable department will likely have your invoice already scheduled for payment. Of course, you will run into the old, “We don’t have a copy of your invoice.” Be prepared to submit another copy ASAP. Hoping that a late payer will “get religion” and clean up past due balances happens rarely, not often enough to rely on; especially in a challenging economy.
Step #2: Avoid extending more favorable terms to a friend of the CEO. My attitude on this scenario is that if the boss wants the transaction done like that, then fine. But I would make sure to get his or her signature approving those special terms. In addition, keep that signed copy for yourself ask backup just to make sure that it doesn’t “disappear”. If it’s for your own company be sure to handle the account in a professional, businesslike manner. If your friend or relative can’t understand why you insist on following protocol, you’re probably better off walking away from the deal. You must establish credible ground rules up front to avoid disaster down the road.
Step #3: Maintain documentary proof of the debt. Believe me, you will have customers that claim they don’t owe you any money, or that they only owe a portion of the outstanding balance. Hold onto purchase orders received (and signed) from the customer, signed quote letters, packing lists, proof of delivery, email communications, everything and anything that provides backup to the fact that service has been rendered as stated.
Step #4: Always get as much credit information as possible from your customer while you are completing the initial sale. When the customer is hot for your product or service they are much more willing to provide information that they might hesitate to give you later on. You can also avoid hearing, “You didn’t need that on all the other orders!” as well. Besides, you can never have too much information if and when an account goes south. Structure your credit application to secure the data you need.
Step #5: Establish a system for determining when to place delinquent accounts for collection. I had a manager that insisted we work our accounts to the ‘nth’ degree before referring them out for collection. That makes complete sense. When we referred accounts out to a third party for collection, it was rare that they collected a substantial amount of what we placed. Whatever your process before referring accounts, work it expeditiously and once satisfied get it off your desk and out for third party resolution! The longer you wait, the worse things will become.
Step #6: Unless you’re dealing with a familiar company, do yourself a favor and check the majority (if not all) of your customers’ references. Make sure you get enough information to at least make an informed credit decision. Ask for at least three trade and one to two bank references. Be on the lookout for inconsistencies in the information that you receive. For example: Your prospective customer claims to have been in business for 15 years but none of their references report info back any further than 5 years.
Step #7: Providing additional services /products to a customer that is already past due on earlier orders. When a customer comes back to you for more business before paying earlier invoices, that is a perfect time to leverage their desire for more product (or service) as a way to receive payment. I can’t count the number of times that I used a COD (equal to the past due amount) method
of delivery in order to get the customer his product and get their account brought current. A real win-win for everyone.