7 Tips to Lower Your Outstanding Receivables and Collect More of What You’re Owed!
Content was originally published on Inc.com on October 19, 2016.
Charlene (name changed) was an attorney with a sterling reputation as a business attorney in Chicago. She was also struggling with cash flow challenges, which is what had prompted her to hire my company as her business coach.
It was Charlene, one associate attorney, and one paralegal, and collectively they were billing roughly $600,000 per year.
“How are you doing on your collections?” I asked Charlene.
“Oh we stay right on top of our collections.”
“Really… help me understand this part on your balance sheet where it shows that you currently have $60,000 in receivables. How much of that will you likely write off as uncollectable?”
Charlene thought for a moment then said, “We’ll likely collect half of that and only have to write off $30,000 per year.”
“Charlene,” I said, “If you’re writing off $30,000 per year that means you’re losing out on 5 percent of your billings per year. That may seem low, and actually for a professional services firm you’re doing better than most, but the thing is, you have an operating profit margin of 30 percent. In other words, at the end of the year you earn $200,000 from your $600,000 in revenue. What that means is by not collecting on that $30,000 you’re losing 15 percent of your total profit.”
She sat quietly for a moment processing what I had shared, at which point you could see her start to get upset.
“You’re right David. I just hadn’t looked at this way before.”
I want to ask you a direct question – business owner to business owner. What is the only thing worse that not making the sale?
Simple, making the sales (and delivering on the product or service) and not getting paid!
One of the most important business coaching tips I can give you is suggestions to improve your business collections process (your “A/R” or “accounts receivable” process.)
Here are 6 small business collection ideas to get more of what your customers or clients owe you:
1. Consider the timing of your bill. Collect up front. If you can get paid before you fulfill your product or service you can eliminate a whole lot of hassle and additional cost chasing down payment later.
For Charlene, she started asking for and expecting any of her larger clients to pay a retainer upfront. You can use the same idea.
Ask for payment in advance. Use phrases like “it’s customary…” or “the standard way we work with our clients is…”
Also, have it as your written policy. There is a power to the written word.
Social proof and authority are strong influencers to have you get what you want.
2. Don’t wait to bill. If you can’t bill before you fulfill, at the very least, give your customers a bill at the time the services are rendered.
Remember, the longer you wait to bill, not only the longer before you get paid and the higher your collections costs, but the more likely you are to have collection problems.
Can you invoice immediately at the time of service or delivery?
Can you process your invoices each week versus monthly so your client bill is likely to get out the door faster?
3. Get your clients to prepay an entire year by providing a terrific incentive to do so. This will help your cash flow plus eliminate the need for the entire accounts receivable collection process. Incentives might include a special add-on bonus or a discount. Or perhaps an impending price increase.
4. Have a formal, written, “credit policy”. Anytime you are waiting to get paid, but have Cost of Goods Sold going out, you’re in reality extending credit to your customer. Don’t fall into this trap unintentionally.
Who are you and who aren’t you willing to give credit to?
Do you require deposits?
Do you have strong written contracts in place before you extend credit, including tough collections clauses to help you get paid if you have to go to collections?
At what point will you stop future work, waiting for your client to come current?
One engineer I know let a major client (a new power plant) get 14 months behind in its payments. Then the project went bust. He only received $150,000 of the $750,000 of money they owed his engineering firm. It took him two years to dig his way out of that hole. If he had had a formal credit policy, and followed it, he likely would have cut off the client at 60 days in arrears, waiting until they brought him current before doing any more work.
5. If your business model must have accounts receivable, front-load the collection process. Send statements out right away and start your follow-up procedures right away, not after 60–90 days have passed. Put that energy in upfront when your odds of collection are highest and payment means more to you.
6. When you ask for money, make it easy for your clients to pay you. Include a self-addressed envelope. Make sure the invoice clearly says who to make the check out to and for how much. Let them pay by credit card or pay pal. Perhaps even hold their payment information on file or set up auto billing.
7. Build a “cost” for your clients into your standard contracts. If you are going to be financing your clients’ purchases then you should get paid for your trouble. Make sure your contract includes a monthly financing charge for all accruing bills. Make sure it also states that they are responsible for all reasonable costs of collection. Finally, where possible, get the business owners of your clients to sign individually and not just use the name of their business. I hope these 7 suggestions help you grow your business by improving your cash flow situation. They made a big impact on Charlene’s business and I hope they do the same for you.