Small businesses regularly fail. In fact, fewer than 50% are still operating within five years of opening their doors. Why is the failure rate so high? Often it’s because management hasn’t established and implemented a strong collection policy. Deadbeat customers walk away with goods or services for pennies on the dollar, either making a small down payment and then “forgetting” to pay or ignoring obligations entirely.
Unless you collect all sales revenue when a product is delivered or a service rendered, your business is extending credit. In accounting terms, you’re setting up a receivable, which is simply money that a customer owes you, whether that customer is an individual or another business. If a significant portion of your revenue comes from receivables and those obligations aren’t converted to cash in a reasonable time, your company is headed for trouble.
How can you help ensure that your business gets paid on time?
- Be slow to extend credit. Consider getting a business credit report if a new customer is another small business. Require up-front payments, COD deliveries, or large down payments until a customer has established a history of paying on time. Instead of waiting until the end of a project to collect what’s owed, require installment payments when milestones are achieved.
- Provide incentives for early payment. It’s common to offer, for example, a discount to customers who pay when a contract is signed or goods are delivered.
- Put it in writing. If you’re expecting payment for services or goods delivered over time, don’t rely on oral agreements. Spell out expectations clearly and put them in writing, including payment terms. Before you start a project, agree on payment dates, discounts for early payment, and penalties for late payment. Reiterate those terms in your regular invoices.
- Follow up quickly. When a payment’s late, call or e-mail or send a letter with a gentle reminder. Maybe the customer is juggling bills and your payment is next on the list. Your goal is to keep good customers and weed out deadbeats. Be respectful, but firm.
- If necessary, be aggressive. Unfortunately, in some cases you may need to hire a collection agency. They’ll take a big chunk of your receivables (some charge as much as 50% of any money collected), but at least you’ll get paid something. Don’t be afraid to use such avenues if warranted.
After all, the success of your business depends on collecting payment for your goods or services.