No small business works in a vacuum. Many industries claim to be recessionproof, but ripples from the broader economy are hard to dodge. Take the issue of your accounts receivable: The same amount of debt owed by your customers might seem manageable when the economy is perking along but become a problem when an economic slowdown is cutting into your customers' incomes and making it hard for them to cough up the cash.
If your cash flow is already slow, the failure to collect money owed can be a big issue. "Learning to collect those accounts receivable quickly and efficiently may be the difference between survival and failure," says Bill Bartmann, former CEO of one of the nation's biggest debt-collection companies. Yet a small-business owner who already has to be a jack-of-all-trades on the job may know little about collecting. Here are a few tips to get you started.
1. Give out as little credit as possible. The most effective way to avoid having problems collecting debt is not to have many accounts receivable to worry about in the first place. Any credit that a small-business owner extends carries risk, and that risk is heightened when the economy is sluggish. "You're going to get a lot more bad debts in a tanking economy," says Chris Kelleher, a St. Louis attorney who advises small businesses. "If it's possible for you to not extend credit, or extend the minimum amount to make a sale, you're miles ahead."
But won't you risk losing customers if you're tight with credit? There are two ways around that. First, you can set up a system of deposits for customers who are wary of paying for your services in full. Write up a schedule of payments that can be made over time, or have the customer pay you as you accomplish certain milestones of the job. That way, if something goes awry, the costs you've sunk into the project are covered. Second, if the customer does not like that compromise, you should ask yourself if you really want that person as a customer. "Anyone who turns that down has waved a red flag saying he doesn't have any money," Bartmann says. "Wouldn't you rather let your competitor have that customer?"
2. If you're going to lend money, think like a banker. No bank would give out money without doing some homework on the borrower. Neither should any small business that is going to play the lending game. But this rule is often broken, says Michelle Dunn, author of The Ultimate Credit and Collections Handbook. When she ran her own collection agency, Dunn saw that most of her small-business clients "were very lax with their credit policies."
She recommends making all customers fill out a credit application and having them update it every year, because financial situations can change quickly, especially when the overall economy is in flux. Basic credit applications can be found at office-supply stores. For a customer who is going to owe you more, you should require more paperwork, just as a banker would. For advice on what information to require, Kelleher suggests, "Ask your bank what they do."
3. Time is of the essence. "You can go broke in a business that has a lot of accounts receivable with no cash," Kelleher notes. Have a system for following up on invoices. "Give a call the minute that account is due," Bartmann says. If you're low on cash and need payment without delay, a phone call can often get results faster than an E-mail or letter because it is harder to ignore, but you don't need to be aggressive. Make it a "friendly but firm" reminder, he recommends. If you have to make several phone calls, become increasingly firm.
What if the phone calls don't work? Showing up in person can shock a customer into action. "It's easy to throw away a letter or hang up the phone. It's harder to deal with owing money when the person is standing right there," Dunn says.
4. Make sure you have the facts in front of you. Before you pick up the phone, have all the information about the customer's account in front of you and make sure you are familiar with it to avoid getting the run-around. The customer might claim that he or she has not received your product or service, or otherwise try to steer the conversation in another direction. "You need to have a comeback right away," Dunn says. If you are well informed, it's much easier to maintain control.
5. Be willing to negotiate if need be. If customers start breaking down on the phone about their dire financial situation, what can you do? "You have to be realistic and work with them to get payments. Otherwise, you're not getting anything," Dunn says. So don't demand the full amount immediately. Ask for a lower amount, such as 50 percent now and the balance later. Ask questions about customers' jobs and when they get paid. That way, you can suggest realistic ways for customers to pay you.
6. If all else fails, don't try to be your own collector. If calling, writing letters, and showing up in person haven't worked and it has been two months since the invoice was due, you're probably wasting your time. It's time to hand the case over to a collection agency or, if there's a lot of money at stake, an attorney. "There are incredible diminishing returns in doing your own debt collection," Kelleher says. "You should be out enhancing sales or getting new ones rather than calling people up and getting money from six months ago."
Mark E. Borofsky of KS @ Jun 07, 2008 21:04:10 PM