Making sales at a decent margin is hard enough, but for many businesses, that is not where the transaction ends. When you sell to other businesses or consumers on open account, the sale doesn't count until the money is collected.
While having money owing appear on your balance sheet as an asset may offer some comfort, it isn't yours until it is collected. And that has to be done quickly and effectively.
Unfortunately, small businesses rarely have the resources to focus on collections. The longer it takes to collect, the more it costs your business.
Your first approach to managing receivables is an obvious one: Lend carefully. You are not a bank but you need to think like one.
Ask for credit references from your client, and check them (there's usually a high level of unspoken co-operation among vendors, even among competitors). Be sure to have a credit application that outlines your intentions on how references are to be used and related privacy policies. You can keep it simple but don't overlook this formality.
The credit you supply needs to come with terms: when you will be paid, by what method and what happens if the invoice goes past due.
It is imperative to communicate and enforce these terms. If you carry receivables, you already know that not everyone is going to pay exactly on time.
Don't miss a chance to send out reminders and statements in a timely fashion. The squeaky wheel gets the grease and you need to be friendly and casual, but pro-active, in your communications with your customers.
Be sure to state your interest charges on overdue accounts and include them with the statements. This interest charge reminds your customer that borrowing your money is not free. Charging 2 per cent a month (almost 27 per cent annually) is not uncommon.
With that said, many small businesses may negotiate away the interest during a collection call to motivate a quick resolution. For most small businesses, charging interest is not a profit centre but a cost-recovery mechanism for the cost of capital and resources invested in collecting overdue accounts.
If you want to inspire good payment habits, consider offering a prompt payment discount. For example, if an invoice is due in 31 days, offer the incentive of a 2-per-cent discount to customers who pay within 20 days.
Don't get nasty
If a customer gets seriously delinquent, you will likely not find a win-win solution by getting nasty – no matter how difficult it is getting for you. Offer a payment plan, weekly post-dated cheques or a return of merchandise as a last resort. Maybe you've been in a similar situation with one of your vendors before – think of what your vendor did to help you through and how you might apply similar tactics.
Send in a collection agency
For invoices that are past your ability to collect, you can assign a collection agency that will take over collection attempts on your behalf on a commission basis (if they collect for you, they charge a commission – often around 25 per cent).
If all of this sounds like too much of a headache, you could consider factoring.
Factoring is the process of selling your receivable to a third party at a discount.
The factoring company pays you a portion of the face value of the invoice immediately and, in exchange, it collects the full value of the invoice on its due date.
Not all factoring programs are the same and many hold you responsible if the invoice is ultimately not able to be collected. But it is a powerful source of cash flow for many small businesses.
Make receivables a priority
No matter what your approach, don't treat receivables as an annoying administrative task. Receivables need to be a huge priority. No other activity in your business will matter much if you don't get paid.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.
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