Billing and Collecting...On Time
A key component of any successful business is getting paid by your customers, on time. However, many business owners focus their energies, key employees, and resources on revenue generation, not collection; only paying attention to the non-paying customer once matters have taken an incurable turn for the worse. Here are some tips to ensure those bills get paid from the beginning of the relationship.
The Problem
• Twenty-six percent (26%) of invoices that are over 90 days old are uncollectable and seventy per-cent (70%) of bills that are over 6 months old will never get paid.
• Businesses nationwide placed $150 billion worth of debt with collection agencies (in 2010).
• The collection industry averages about a 20% rate on collecting on bad debt.
As the statistics above confirm, companies should focus on getting paid well before there is an over-due invoice.
Best Practices
1. Know Your Customer’s Credit. Companies routinely agree to provide goods and services on a 30 or 60 day basis without any idea of the client’s payment history. A better practice is to either collect funds up front until the customer has established a direct credit history with your business or to obtain a credit report beforehand.
2. Document the Terms. Make sure that payment terms are clearly stated either in a purchase order or contract, including interest and penalties for late payments. Include processes in your customer relationship so that customers are required to sign for goods or accept services at the time they are delivered. Having payment terms and acceptances in writing will be very helpful in the event of a dispute.
3. Invoice Timely and Make it Easy to Pay. A haphazard or ad hoc billing system confuses the customer and makes it difficult to monitor payments. Follow the payment system and timing established in the purchase order. Provide easy payment options including credit card, ACH transfers and ability to pay online or by phone.
4. Follow up Immediately. Late payments should not be taken lightly. As soon as a payment is delayed, a second notice should be sent and a phone call made to the accounting department. If the customer is able to pay, your company will be paid faster, and if they are not able to pay, you can at least begin the process of negotiating a payment. Offering discounts is another way to get paid quickly. Keep in mind that if the customer is in serious trouble, any payments made within 90 days of filing a bankruptcy may be recoverable by the bankruptcy trustee, so the sooner you receive payments, even discounted ones, the better.
5. Establish the Payment Plan in Writing and Follow it. If the customer requests extra time to make payment, follow up with written documentation for their signature. Each step of the plan should be documented and followed up on immediately. The plan should give you the ability to collect the full amount as soon as any payment in the plan is not made and to stop further delivery of goods or services.
6. Use Collection Agencies or Attorneys. If payments are consistently late or there is no contact with the customer, then get a third party involved. Most agencies and collection attorneys, will provide the services in exchange for a percentage of the recovery amount, often on a sliding scale basis. Once again, delaying the effort will not help the cause. Keeping in mind the statistics above, begin the process as soon as possible.
Good invoicing and collection practices are a critical factor in a running a company, it ensures healthy client relationships, positive cash flow and allows management to focus on other aspects of the business. Thoughtful consideration should be given to this aspect of the business with a focus on vetting customer’s up front and following up on unpaid invoices early and often.
Business Insights is hosted by the Law Firm of Kumar, Prabhu, Patel & Banerjee, LLC (KPPB). Sonjui L. Kumar is a founding partner of KPPB Law, and a corporate transactional lawyer representing companies in all aspects of corporate law, including cross-border transactions. Disclaimer: This article is for general information purposes only, and does not constitute legal, tax, or other professional advice.
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