You can deter deadbeat customers--with top-notch credit policies
Some trends are just plain terrible. Take the boom in business for collection agencies, a sure sign that their corporate clients are failing to collect outstanding accounts receivable. According to a recent survey by a division of the Commercial Law League of America, in 1995 collection agencies handled a record $3.9 billion worth of delinquent accounts. That represented a 15% jump from 1994 and the 10th consecutive quarter of increases in collection agencies' business.
For small-company owners, this is a trend to resist. It's too costly to rely on outside experts to collect overdue bills, because fees can reach as high as 50% of funds collected. A better solution: up-grade your company's receivables policies. Below, you'll find valuable advice on that topic from three businesspeople with collection expertise.
Rick Burrock, managing partner, Boulay, Heutmaker, Zibell & Co., an accounting firm based in Minneapolis:
"You can't let yourself slip into the 'ship and bill' mentality. You need to convey to your customers, right from the beginning, that you will work very hard to satisfy them and that in return, you expect to be paid on time.
"Start by investigating all new customers. A credit report helps, but with business customers you can find out even more by requesting financial statements. Many companies will balk at giving you their income statements. But if they'll provide a balance sheet, that's usually enough to help you figure out how well capitalized they are--and thus, how likely they are to pay their bills. Using the balance sheet, divide current assets by current liabilities to calculate the current ratio. If a company's ratio is below 1.00, it will be paying out more than it expects to collect; you may want to reconsider doing business with that company or insist on stricter credit terms."
Patty DeDominic, chief executive of PDQ Personnel Services Inc., a temporary-help service in Los Angeles:
"During 17 years of operation, we've had to turn very few overdue bills over to collection experts, which says a lot, since we handle more than 400 corporate clients each year. I'm a big believer in spending a lot of time up front to avoid collection problems.
"We spell out our terms--payment upon receipt of a weekly invoice--before we sign up a new customer. We ask new customers in advance whether those terms will conflict with their internal policies. When there's a conflict, we will try to work out an acceptable compromise, as long as the customer doesn't pose other credit risks. Then we follow up with a written document reiterating our terms.
"We also try to identify customer-satisfaction problems early, since those can lead to problem-payment situations. We'll start to investigate once a payment is one week late. We have a company-wide database in which employees file reports of every contact with a client. That way, our staff can identify customer inconsistencies and failed promises. If a client is lying to us, I'll turn its bill over to a collection expert promptly. But if I believe a company is simply experiencing some tough times, I'll work with it."
THE COLLECTION PRO
Michael Flock, senior vice-president of Dun & Bradstreet Receivable Management Services, based in Parsippany, N.J.:
"People tend to wait too long to address their accounts-receivable problems. If you've got a bill that's 45 or 60 or 90 days old, it may be tough to collect. It's better to identify problems earlier. Look for warning signs: your customer breaks promises, pays with post-dated checks, changes banks or payment patterns, or returns merchandise without authorization. There may be an explanation for any of those occurrences. But once you detect one or two of them, it's worth investigating.
"It doesn't make sense to impose the same collection standard on every customer. We recommend segmenting your customer base into high- and low-risk categories, according to their credit histories, your own experience with their payment patterns, or the size and risk level of their debt. If a good, steady customer occasionally makes a late payment, you can afford to be flexible. But you need to have systems in place that tell your staffers early on how to behave when a high-risk customer pays late.
"There's no fixed rule about when it makes sense to turn a bill over to a collection expert. If you do decide to turn some overdue invoices over to an expert, shop around. There's more fee flexibility than you might expect."
Is Your Accounts-Receivable System Up to Par?
If your business has too many slow-paying customers, perhaps it's time to revamp--and tighten--your credit policies.
* Do you have a policy that spells out your expected payment terms and your internal procedures to handle slow-paying customers?
* Has that policy been circulated to all employees, including salespeople?
* Do you send a copy of your payment terms to new customers and request signed approval?
* Do you perform credit checks on new customers by contacting credit-rating services, analyzing recent financials, or checking credit references?
* Have you segmented your customer base into high- and low-risk customers? Is there a system in place to help employees handle those customers differently?
* Do you and other managers receive a weekly accounts-receivable update that lists slow-paying customers?
* Are your financial and sales staffs encouraged to work together to collect late payments?
* Have you established clear trigger points that tell you when to turn a bill over to a collection expert and when to stop doing business with that customer?