Finance for Small Businesses

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Keep Your Accounts Receivable From Eating You Alive

Filed under Finance.

Any small business that hopes to prosper will have to keep a tight grip on its accounts receivable. The key to keeping a tight grip is to understand that the bill collection process really begins as soon as the sale is made.

Collecting overdue accounts can be an especially tough process for small businesses because debtors often believe they can put off payment to a small business longer than they would to a large company. And most people find asking or demanding payment a difficult task.

Reluctance to collect a debt often has psychological roots. Guilt about profiting off another, anxiety over a potential confrontation, and fear of damaging a business relationship are reasons why many people let bills slide. Often, creditors over-identify with tardy customers and help rationalize the late payments.

But it's essential that you not let the difficulty of the task distract you. Try applying these ideas when you're contemplating a sale of goods or services, thinking about extending a line of credit, or dealing with an overdue payment:

  • Be inquisitive -- Realize that when customers list references on a credit application, they are naturally going to list only their best references. "Find out why they switched" their business to you, recommends Peter Szabo, a collection agency owner in Chicago with 23 years' experience. "Why were you so lucky to get the sale?" Find out if they have other debt and whether other suppliers have cut them off.
  • Move swiftly -- Szabo believes that it's time to take action when a client, especially a new account, is 15 days past due. If you don't follow up, you're training them to be a late payer, he warns.
  • Don't be shy -- "If you have a past due customer out there, you're on the verge of not having a customer," Szabo points out. Collecting is a competitive sport; if you're not getting paid, someone else is.
  • Keep talking -- Verbal communication is best, Szabo says.
  • Know when to say when -- Don't wait the typical 90 or 120 days before cutting off credit. The time to cut your losses is sooner rather than later, Szabo says. He suggests cutting off credit at 60 days past due.
  • Know when to back off -- Don't get emotionally involved, Szabo warns. If that happens, its better to back off and let a third party, such as a collection agency, handle it.

Never forget that the success of your business may depend upon how well you are able to collect overdue accounts. For more advice on how to keep overdue accounts from ruining your business, take a look at our discussion of credits and collections.

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