By Jeremy Lichtman, 23 January 2006
Note: The author originally wrote this article while working as the CTO at MIT Consulting, and IT consulting company. He is now the CEO of Lichtman Consulting (www.lichtman.ca).
If you are the CEO or manager of a small business, you’re probably already running, screaming at the top of your lungs, for the nearest available shelter. While you are hiding under the reception desk, consider this: accounts receivable, and the often difficult task of collecting them from your clients, can be one of the toughest tasks that small businesses face.
The good news is that it really doesn’t have to be that way. It turns out that the key to collections is simply being organized. My company, MIT Consulting, has had its fair share of collections issues over the years, and we’ve come up with the following list of tips and tricks for keeping our AR as low as possible:
1. Set rules up front with your clients
Many business owners are (strangely) reluctant to talk about money. They’d rather discuss their products and services and how they meet their client’s needs.
It is very important, however, to write down a list of rules for how you expect to be paid, and make sure that they are in the contract (you do have a contract with your client, don’t you?), and that you have discussed them before any work has started.
The rules could include things like terms of payment (i.e. 30 days after the invoice date), or a complete payment schedule, with specific dates for each payment due.
2. Get money up front
Depending on your business, this may vary in difficulty. At the very minimum, you should insist on a substantial deposit prior to starting work on a project. The deposit amount will obviously depend on the kind of work you are doing, as well as the total size and timeline of the project.
If you will incur large outlays (i.e. you have to buy equipment for your client), it may make sense to get the client’s credit card number and make sure that you have received payment before you even place the order! After all, if your client wants to buy a computer from Dell, they have to pay before the computer is even built. Why should you have to run after your client for the bill afterwards? “Financing” our clients was a mistake that we used to make in our business, and the resulting cash flow issues caused us major grief.
3. Offer discounts for early payment
This trick was suggested to us by our accountant a few years back. It won’t work for all clients, but for those who are actively watching their bottom line, a discount of 1 or 2 percent for early payment (i.e. less than 10 days after the invoice date) might be sufficient to make them pay up.
3. Keep track of your AR
Hopefully you have a proper accounting package in place. My company runs Business Vision, and there are a number of useful reports that can help keep track of collections. I print up the current AR report on a weekly basis, as well as the cash receipts report for the previous few weeks. This means that I have a good idea of who owes us money, and how much.
4. Make weekly collections lists
Every week, we sit down with whoever is going to be making calls and put together a list of who to focus on for that week. One week we may target the clients who are most overdue with payments. Another week we may focus on those with the largest outstanding amounts.
5. Set weekly collections targets
After we have set a list of who we are going to call, we put the list (along with the amounts for each client) on a whiteboard, with a goal at the bottom. As we successfully collect money, we update the whiteboard. That way we know how close we are to meeting our weekly goal. If you don’t set goals, it is hard to track your progress!
6. Keep notes of your calls
It is extremely important to keep a list of who was called, when they were called, and what was said. We often find that collection calls can result in other, useful information about our own level of customer service. Sometimes clients may discover errors on an invoice that slipped through our checking process, or they may have a complaint about the level of service they have been given. If that information isn’t recorded, it is lost. So write it down!
7. Set time aside daily time for calling
Calling clients for money is such a painful process for many people that it is easy to let it slide. It is important to set aside specific times of the day during which you will be calling. Make sure you stick to your schedule.
8. Consider hiring somebody to just do calling
The job has to be done. If you can’t do it, hire somebody who can! Make sure that they have a realistic “script” to follow with clients, and give them clear instructions on how to handle problem situations. Listen in on a few of their calls, at least at the beginning, so that you have a feel for how they are doing.
9. Be nice but firm!
There is nothing that is guaranteed to lose your clients than a rude, obnoxious bill collector. Yes, they may get results, but if you lose the client as a customer afterwards, that doesn’t help your cause.
On the other hand, if the collector appears weak-willed, they are unlikely to be able to collect, particularly from tough customers.
The key is to be firm but polite. If the customer says that they can’t pay now, ask them when would be a good time to call back. If they have an issue with something on the bill, listen to their concerns and take detailed notes. Then follow up.
This approach often results in a better, more up-front relationship with the client over time, and may help your business in other ways.
10. What do to if the client won’t (or can’t) pay
There are always going to be a few clients who can’t or w
on’t pay their bills. In our experience in the service industry, a few percent of the total invoices that we send out turn out to be uncollectible for various reasons.
When this happens, our rule of thumb is to determine whether we are likely to ever do business with the client in the future, and also whether sending the bill to collections or suing the client is likely to have other repercussions. It is a good idea to discuss the specifics of each case with your lawyer as well (you do have a lawyer, don’t you?).
Bear in mind that if you send the bill to collections, or sue the client, you will likely only collect a portion of the total amount, since the collections agency or lawyer will want their “cut”. It might be worthwhile to talk things through with the client instead (if this is possible), and see if it is possible to collect a portion of the bill at the very minimum.