Managing Cash Flow

Learn about best practices to manage cash flow.

Improving Your Debt Collection Practices

An overview of different methods to use when chasing down debtors and the overdue bills owed to you.

Collecting overdue accounts is, for many small business owners, a vile task because keeping track of which accounts are overdue can be so difficult and because few people really enjoy hounding others for money.

The key to improving your ability to collect overdue accounts is to get organized. Let's look at some steps you can take to get your collection house in order.

Use Software

If you have a lot of customers buying on credit throughout the month, each with different terms, keeping track can be extraordinarily difficult. There are a number of software programs, however, that can greatly simplify this task. Some of the basic accounting software programs, for example, can generate accounts receivable aging reports that will help you keep track of which accounts are past due and by how much. If keeping track is a problem for you, take a trip to your local software store.

Use Personal Visits

Of the three basic means of contacting a debtor--letters (or e-mail), telephone calls, and personal visits--letters are generally the least effective method, while personal visits are the most effective. Telephone calls fall somewhere in between.

The actual combination of approaches that you will take will probably vary from customer to customer and will depend upon factors such as the location of your customers, your relationship to each one, and your cash flow needs. Always use the most effective approach available to you. In other words, personally visit all those you can and call the rest. Use the letter as a last resort.

Start With a Serious Letter

If you must use a letter, avoid what has become the standard approach. Conventional wisdom holds that you start your debt collecting with a letter gently reminding the customer that the account is past due. That letter is followed up with still more letters, each one becoming a little more threatening than the previous one. After the sixth or seventh letter, you've threatened them with collection agencies, lawyers and lawsuits. Sometimes it works, but most often it doesn't.

Most people know how the game is played. They know that if they receive the gentle reminder, they still have a few letters to go before they have to get serious about paying the debt. If you want to start with a letter, fast-forward the process by paying an attorney to write it for you. You can probably get one to write it for you for no more than $50-$75. The attorney's letterhead serves to show the debtor that you are serious.

Learn the Debtor's Payment Cycle

If you deal with large companies, you need to get in tune with how they pay their bills. Find out from them when the last day is for getting an invoice approved to get into this week's (or bi-week's or month's, depending upon how they pay their bills) check run. When you need to collect from them, call a couple of days before that date to make sure that they have all the documentation from you that they need.

If you have a problem with payment from a large company, talk to the person who is responsible for buying your goods or services (perhaps in the purchasing department). Don't allow yourself to be sent to accounts payable. Your best leverage is to threaten to withhold your goods if payment is not made. While the purchaser may respond to that threat, the accounts payable person almost surely will not.

And if you do business with the government, consider taking a government-sponsored seminar on how to get paid. They're offered quarterly in all major cities.

Use Skip-Tracing

Skip-tracing is the process of tracking down someone who owes you money. When an individual skips out, he or she generally moves away to another city, to another state, or to another country. When a corporation skips out, it generally ceases to exist.

You should consider running a skip-trace as soon as you see any sign that the debtor may have disappeared, such as your mail being returned or the debtor's phone being disconnected. To find a professional skip-tracer, look in the Yellow Pages under "skip tracing" or "private investigators." It'll cost you about $30 per skip-trace, so don't skip-trace an account unless the dollar value is high enough above that figure to justify the trouble.

Take these simple steps and your overdue account situation should improve.

Category : Managing Cash Flow
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