Once you make the decision to extend credit, you need to carefully monitor the status of your receivables (the term for money owed to a business). In most cases, the longer an account goes unpaid, the more difficult it will be to ultimately collect.
Uhlman recommends using a computer-based accounting package that can generate invoices, issue statements, track payments and create aging reports. Aging reports are important because they give you an overview of how much money is owed to you, and how long the specific amounts have been outstanding. You should review them at least once a month, and be prepared to implement your collection procedures early. "There are a number of good software packages on the market," Uhlman points out. "Your accountant or computer consultant can help you choose the best one for your business."
In any collection situation, Uhlman says, the first thing you must do is establish that there is a legitimate debt. "Confirm that there is no dispute over the amount charged, the quality of the product or service, or anything else," Uhlman advises. The best time to do that is immediately after the sale, and you can even incorporate this step into your quality control and customer service procedures.
"Within a day or two after the product has been delivered or the service performed, call the customer and confirm that everything is satisfactory," Uhlman says. "You should also restate the amount due and get a commitment for payment. It's an extra step, but it's amazing what it will do for reducing the number of disputed accounts, which can be much more difficult to resolve 30, 60 or 90 days later."
Scott says there are four stages to the collection process: the notification or polite reminder; the discussion; the "push," or firm demand; and the "bitter end."
Use these stages to determine a standard time line for your collection efforts. Just as you may have different requirements for extending credit based on the size and nature of a particular account, you may approach collections from different angles depending on the amount of the debt. What's important, Scott says, is that you determine a procedure and apply it consistently, which prevents you from having to hear, "You didn't call me last month when I was late."
The notification stage may consist of a reminder notice or perhaps even a brief phone call. Take a positive, upbeat approach. You might say something like, "Our records indicate this bill has not been paid; can you check on it?" Typically, you want to do this five days after the account becomes past due.
During the discussion stage, you need to find out why the debtor has not paid and motivate them to get the account current. Scott says this stage can last from 15 to 45 days. During this time, you may discover information about your customer's circumstances that could influence your decision to grant further credit.
When you reach the third stage, you must strengthen your demand for payment. If possible, have someone else in the company try calling; a different approach may work. Scott recommends limiting this stage to 10 days, then moving to the bitter end stage, when the account is turned over to a collection agency, referred to an attorney for suit, or taken to small claims court. Collection activities are regulated by both federal and state laws. In general, Scott says, you should avoid any falsehoods, misrepresentation, deceptive practices, harassment or abuse of the debtor, or invasion of the debtor's privacy.
Check with an attorney familiar with the appropriate laws before implementing your collection strategy. Scott says persistence is often the key to successful collections. "Remember, it's your money," she adds, "and you don't make money until you're paid."