Many small businesses do a good job of delivering their goods and services, but then find it difficult to collect payment, often leading to a cash flow crisis. This may be because a customer’s creditworthiness was not properly vetted at the outset, or it may be because insufficient attention was paid to tracking and collecting overdue invoices. Either way, it behooves a business owner to establish reasonable credit policies, use proven techniques to optimize cash flow, and enforce terms diplomatically but firmly because “the sale is not complete until the money is in the bank”.

1. Optimize cash sales to avoid risk

There is no cash credit risk. If your business allows cash payments and invoices, optimize the amount of cash, as a percentage of total sales, to the highest possible level for your industry or business sector.

2. Get deposits whenever possible

Larger sales orders, build-to-order, and custom orders in particular, should require a deposit of 10-50% of the final purchase price at the time of order. This will go a long way to alleviate cash flow crunch and also ensure customer commitment to the order. Deposits of this nature should not be refundable.

3. Suggest credit cards to secure payment

Make sure you have the ability to accept all major credit cards (Visa, MasterCard, America Express, and Discover). This is the best alternative to cash and reduces payment risk. In many cases, it also makes it easier for a customer to place an order. Customers who object to prepaying can be safe by placing a “hold” on the sale amount against their card and processing payment only after product is shipped or service is completed. This guarantees your payment (for a period, usually 30 days) but does not appear as an advance payment to the customer. For credit card sales that are processed, your business account is typically credited by the credit card processing company in 1-3 days for a 2-3.5% service fee.

4. Require Progress Payments for Work Orders in Progress or Contract Sales

If you make a product or perform work over a long period of time, say several months, include specific payment due dates in your sales contract (for example: 10% at time of order, 40% at 60 days, balance at the end). This will go a long way to avoid cash shortages and provide funds to continue the project. In many contract sales situations, the deposit amount is effectively the profit on the order and is obtained in advance; the balance or cost of the product is then transferred from the customer to the supplier under normal payment terms.

5. Develop and use a credit application form

Every business, large or small, that makes invoiced sales should have a credit application. This can be as simple as a one-page form, which can be faxed, providing critical information such as the name and phone number of the customer’s accounts payable contact, department head, and CEO. The form must also require a minimum of two business references and one bank reference. A key administrative person (in smaller companies, typically the Office Manager) is delegated the responsibility of obtaining the information on the form, checking references, and suggesting a credit limit based on the findings.

6. Set a credit limit for every customer, big or small

After checking credit references, a credit limit must be established for each customer. For small customers, the credit limit should be set based on their demonstrated mid-to-high payment performance. For large businesses, a credit limit should be set based on the amount of risk your business is willing to accept and is a direct reflection of the percentage of your business you’re willing to dedicate to a customer. Normally, concentrating more than 10% of your business on a single client starts to be a risk; 30-50% is very risky and more than 50% is a potential disaster for your company. Bad things can happen to big companies too.

7. Monitor the aging of accounts receivable by total and by customer

At least weekly, calculate the average age of your pending invoices per client and total. Assign responsibility (eg, Office Manager) for generating and reporting this information. Develop an “Overdue” report that shows each invoice 5 days or more past its terms. Set specific, reasonable goals based on your industry for “Average Days Receivable” and tie a component of your Office Manager’s compensation package to achieving the goal.

8. Develop Standardized Procedures for Overdue Invoices

Develop a formal, written collection procedure that includes scripts or guidelines for contacting customers who have outstanding or overdue invoices. The treatment adopted is always courteous but increasingly firm as the delay time increases. Usually the first call is just a courtesy consultation. At 60 days they can be reminded of the company’s terms and their credit is in jeopardy, at 90 days their account will revert to COD, and at 100 days the litigation can continue unless payment is received promptly. If the last stage is reached, you should be prepared to proceed promptly.

9. Avoid claim letters early and use the phone

Complaint letters, overdue notices, and billing statements indicating a past due invoice often do nothing more than irritate a responsible customer who may have a reasonable explanation for slow payment. Instead, it is preferable for your accounts receivable person to phone the designated customer accounts payable (found on the credit application) to ask if the invoice has been lost or if there is some other problem . Typically 80% of late payments are resolved this way and a relationship is created between key personnel from both companies.

10. Use discounted payment terms wisely, if at all

Offering an early payment discount does not always produce the desired results. If your customer’s problem is cash flow, you won’t be able to take advantage of the discount. Often customers who already pay on time will take advantage of the discount. You can rightly rationalize this as rewarding good customers, but you’ve just lowered your overall profitability as a result. Discounts that are attractive to customers often do not produce a favorable payoff in time value of money for your company. It’s best to survey your slow-paying customers individually first, to determine what the potential value of the discount might be to your cash flow.

11. Use your accounting system to help manage credit and accounts receivable

Many small businesses use simplified accounting systems like QuickBooks or Peachtree and these systems are able to reduce the amount of time it takes to manage accounts receivable. The customer can set credit limits and the system will provide a warning message when entering a new order in case that order exceeds the limit. Aging reports by customer can be generated in a variety of formats. The data can be exported directly to an Excel spreadsheet for further analysis if desired. Invoice data can also be exported directly to a customer via fax or email, saving considerable time. Current customer contacts and phone numbers are included in customer records and can be quickly extracted and used in screen reports to assist with collection calls. Be sure to use all of the features of your accounting system to assist in your efforts to manage credit and accounts receivable.

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