Very few entrepreneurs begin their business ventures with the goal ofbecoming collection agents. Unfortunately, some of us have foundourselves in this unwelcome and unsavory role as a matter of businesssurvival. Developing a consistently successful accounts receivablesprogram does not have to be daunting. By following somestraightforward, time-tested guidelines, you can implement a "win-win"strategy that gets your invoices paid on time and allows you tomaintain positive, long-term business relationships with clients. Whatfollows is a discussion of how to walk the walk, and talk the talk, ofcollection.

Money Talks, and So Must You
Why do some business owners seldom, if ever, voice complaints aboutpast-due balances, while others spend significant time on thisproblem? Much of the answer begins long before an invoice is sent.Indeed, one of the most valuable changes you can make in youraccounts receivable process is to define payment expectations withyour clients in advance of services performed. You can also enter intoa formal agreement that includes a sum to be paid up front, and thenverbally review what you will do for the clients. Here's how:

  • Establish financial boundaries. Discuss money during your firstmeeting with a client. Explain in a clear and concise manner exactlywhat you will do for the client, while clearly stating yourcompensation terms. Discuss in detail, for example, the cost of avisit to the client's site or two rounds of revisions on a project.Your clear communication during this meeting is essential because itestablishes important financial boundaries with the client.
  • Formalize an agreement. The boundaries discussed at the initialmeeting should then be documented in writing. In an obligatingagreement, you should list the specific services to be performed orwork to be delivered and the estimated cost of the services or work.This agreement should explicitly state that your client owes you moneyfor work performed or services rendered. The agreement should alsospecify the terms of payment, including the payment you expect inadvance of services.
  • Request money in advance. If it is the accepted practice within theindustry, business owners should request a portion of their money inadvance. In its professional services business, SBT requires allclients, large and small, to pay a retainer that lasts across the life the job.Using the terminology of the industry is important, such as "deposit onhard goods" or "retainer on services." This allows the client tounderstand you are asking for something others will ask for as well.

    In one case, we at SBT asked an international freight company with worldwide offices for adown payment of one-third. The freight company balked, but weinsisted. Even if we came down to 1% from our originalrequest, we would be able to say to other clients that we requiredthis internationally known corporation to pay a portion in advance.Remember, you can acquiesce if the client protests -- the freight companyunderstood our position. But if you allow no up-frontpayment, you will have a much harder time later with other clients, andyour cash flow is affected significantly.

  • Review verbally. Take the time to review the agreement with yourclient before signing. This will enable you to reinforce the financialobligation that the agreement specifies. You can also use this verbalreview time to inform your client about the value of your work. Thetalk might go something like this: "By adding these modifications toyour system, you'll be able to process incoming orders inapproximately half the time it's now taking." Simply stated, you aretelling the client exactly what you are providing for a specificdollar amount, and therefore defining the client's expectations. Thereshould be no question at the end of your meeting about what is beingdelivered, when to expect it, and how much it will cost.

Repeat after Me: "I Will Not Make Collection Calls"
Having personally defined the agenda for payment with your client,your next step in the accounts receivable plan involves separatingyourself from the collection process. Your business role now becomesfostering a long-term relationship with your client. This can be atall order if you are the person picking up the phone to demandpayment. Walking this walk involves two steps:

  • Designate an agent. It is imperative that the task of remindingclients to pay their bills, as well as more advanced collectionactivities, be undertaken by someone else in your office, such as anoffice manager or administrative assistant. You might also considerhiring a third party to handle the job.
  • Distance yourself. When you have designated an individual to serveas your accounts receivable manager, you can distance yourself andyour business role from the collection function. Should a client callyou to complain about a collection call, you can respond with acomment such as, "I'm glad you contacted me. I'll talk to myaccounting department about this. I'm sure we can get it straightenedout." This necessary separation allows you to maintain a distinctlydifferent image in the mind of the client.

In your goal of preserving the valuable business relationship you havebuilt up with your client, while at the same time holding the clientto a contractual obligation, you are again establishing a boundary.This time, the boundary is more illusory than the written contractthat defined your terms. But it is a boundary nonetheless: You aretraining your clients to view your "accounting department," oraccounts receivable manager, as an autonomous arm of your business.You are also allowing yourself to concentrate all of your energy onbuilding your business.

Stay on Top of Your Invoicing Game
This brings us to your internal accounting procedures and how theyaffect your accounts receivable plan. The rule here is simple: keepyour side of the street clean. Here's how:

  • Set billing standards. Do not expect your client to pay anincorrect invoice, or to pay the invoice on time if it is sent outlate. Hold yourself to an invoicing standard calling for no errors andconsistently punctual delivery, allowing ample time for your clientsto meet your agreed-upon payment terms.
  • Set accounting standards. What is the best way to ensure accurateand timely invoicing? Consider the method you now use for billingyour clients. The off-the-shelf accounting package you probably usedto start your business was fine, but as yourbusiness expands, so does your need for an automated accountingsystem. In anticipating growth and change in your business, look foran accounting system that provides features such as automatic updatingof customer and inventory balances and flexibility for modificationsas your business evolves.

Solve Your Accounts Receivable Problems Today
Having involved yourself in setting the payment agenda, distanced yourself from the billing process, and put your internal systems in order, the final step is collecting from slow-paying or nonpaying clients. This involves an especially delicate walkand an artfully nuanced talk. Consider these steps:

  • Use late-payment fees. While it is almost impossible tocollect late-payment fees in a commercial business relationship, youmight use them as a tool that brings a collection problem to light. Ifyou do, be consistent about when you add them. When negotiatingfor payment, you can then say, "If you overnight your payment tous, we will remove all or part of the finance charges" that will occurafter 60 days. Do not book these fees as revenue, and don'texpect them to be paid. Forcing this issue sends a client toyour competitor.
  • Bring payment issues to a head. For really stubborn payers, itmay be necessary to confront the problem directly. The best time to dothis is at the most critical stage of the client's project. In thepast, we have often asked clients to put themselves in our shoes. Wehave a payroll, other clients are paying as agreed, and we must keepthe business running. We also make it clear that a delay in paying usis forcing us to stop work on the project so that our business cansurvive. We explain that if all clients were like this, we would beout of business. This sends a very clear message.
  • Consider arbitration. When it comes to legal action, only thelawyers make out in most cases. Therefore, we prefer to call forarbitration when an agreement or contract is disputed. This is lesscostly for both parties, and allows issues to be resolved faster.Always warn the client that he is forcing you "to bring in a thirdorganization or person" to assist in resolving the payment issue.
  • Stay calm, be fair. Businesspeople respect other businesspeople who are fair, so treat clients as you would expect to betreated. Stay calm at all times, repeat options verbally and inwriting, and consider compromise. I have told many clients, "Pay usnow, or pay us later. We will write a credit for this issue, but itwill cause us to consider our pricing much more carefully." Mostclients who want to do business with you would rather keep youhappy -- and paid.

There's no time like the present to implement a new approach togetting paid on time. The incentives are obvious, and the necessarystart-up time is minimal. The plan outlined above is remarkablysimple, but requires consistency and follow-through on your part.You will be amazed at how quickly you see positive results.

William H. Mills is president and chief operating officer of Software Business Technologies Inc., and its subsidiary, SBT Accounting Systems.

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