Itís a common misconception that clients who fall behind in their financial obligations are debtors that simply evade paying their bills. Often times businesses lack the ability to implement and enforce a sound credit management policy for themselves as well as for their own clients.
It is not unheard of to encounter a customer that for one reason or another refuses to pay, evades paying, or requires constant requests to bring their account current. Implementing and enforcing a Credit Management Policy will have a tremendous impact on minimizing late payments from your clientele.
The first rule of thumb when signing on a new client is to verify your potential customers information. It never ceases to amaze me how many companies sign on a new client without this essential information. Some examples of ID verification should include the tax ID number for the business, the physical address as well as the mailing address, phone number, fax number, e-mail, and personal identification such as a copy of the potential clients drivers licence.
Implementing an effective credit policy begins at the sales presentation. Prior to extending credit to a potential customer you should check their credit worthiness. Requiring credit references from current vendors, or business associates may be effective for short term repayments (30 to 90 days). In some cases, the potential customer may provide you with a reference from their banking institution. A credit policy should be considered a contractual agreement and renegotiated annually.
The most effective way of determining the credit worthiness of a customer is obtaining a credit report. A credit report will divulge any judgements or liens against a potential customer along with a payment history that reveals the timeliness of payments theyíve made.
Once you have established your customer as a good candidate to conduct business with, it is important to monitor their payments. If you observe variations in their payment history this could indicate a change in their ability to pay. Receiving a NSF check should raise a red flag, late payments, or excuses such as I never received the invoice may indicate a change. If any of these events occur, you may be faced with the need to reestablish your customers credit worthiness. Request a current credit report from the credit bureau to determine if you should suggest alternative payment arrangements.
In a perfect world, we would all relish no risk factors in our business transactions, unfortunately, we donít live in a picture perfect world. Taking risks is a big part of business. When running a credit report on a potential customer, it is likely you will discover their credit is less than perfect, this doesnít necessarily mean you should kick them out the door.
You may determine you need to be creative in your payment requirement. A contractor may require 50% up front with the remaining balance due upon completion of the project. A promissory note may be an option when dealing with an established customer that has encountered cash flow problems. If the potential customers credit report reflects prior payment issues, but has shown improvement in recent months, you may say something like... "I noticed you experienced previous credit problems, but itís apparent you are making progress in turning that around. If you would sign a personal guarantee, I would be glad to report positive payments to the credit bureau to help you reestablish your credit."
When considering doing business with a new customer, you may want to offer smaller credit limits to begin with. Many credit card companies are now offering small credit limits to consumers that are experiencing financial challenges. This would be especially advisable if youíre working with a one time business transaction.
Knowing what youíre up against ahead of time greatly assists you in making informed decisions, it also alerts a potential customer that you are serious about your business and are firm in your payment requirements. You may be surprised to learn how many potential customers assume youíre an easy target if youíre too eager to sign the deal just to make a sale.
Clearly define your sales terms verbally when discussing business agreements. You will inevitably encounter the potential client that is aggressive in dictating their own sales terms. Beware of the individual that walks through your door dictating their terms to do business. You are providing the services, therefore it is you that should be dictating the terms.
Once you have defined your sales terms verbally, it is essential that the terms are dictated on your invoice as well. When you establish a new account, print the initial invoice before your customer leaves, ask that they read and sign the terms of sales to acknowledge they accept your terms. If the new agreement is made over the phone, offer to fax the initial invoice, and request that they return it with a signature. Do not proceed with the services or deliver merchandise until the terms are signed and accepted.
It is imperative that invoices be issued upon completion of services, if you are shipping merchandise, the invoice should accompany the product being shipped. Prior to issuing an invoice check that the invoice is accurate and provides all pertinent information.
Information Check List For Invoicing:
Shipment Date/Shipment Method
Creditors Business Name And Address
Contact Name & Phone Number For Inquiries
Invoice Number/Order Number
Description Of Contents Included In Shipment
Price Of Each Item Ordered
Subtotal Of All Items Ordered
Shipping And Handling Charges
Total Balance Due (Be Certain to Include the Due Date)
Terms and Conditions:
This is where you would dictate the service charges that will be applied in the event the invoice fails to be paid in a timely manner. Be certain to include specific information such as percentage rates and time lines of applicable service charges.
Managing incoming revenue can be challenging if you donít have an effective software installed into your computer system. In years past the A/R was predominately tracked on a spreadsheet. In todayís world technology has simplified tracking account receivables and managing aging reports. Many small businesses are using QuickBooks software by Intuit in their account receivables departments. QuickBooks is fairly simple to navigate and provides online support as well as manuals to walk newcomers through the program. If you have a new business or are researching software you can implement into your account receivables department go tohttp://www.quickbooks.intuit.com and check the variety of software available to you.
The aging report should be updated and monitored regularly to maintain accurate A/R records. The aging will assist you in identifying potential collection problems, by alerting you when accounts fall behind. It will also provide you with the payment history of each of your accounts and show any variables in payments received.
When pursuing past due accounts, timing is essential. Donít allow accounts to sit idle before contacting the client. Too many receivables staff delay collection call maintaining the idea the account will be paid sooner or later. As in all walks of life, time has a way of passing us by unnoticed. Make contact with your client the first day the account becomes delinquent. Begin your inquiries by saying... "Did you get our invoice?" or... "Is everything okay with your order?" A friendly reminder can alert the client that youíre on top of things, theyíll understand itís not likely the invoice can be set aside to pay later.
Often times, when an account becomes past due, the client is simply trying to buy a little time, and will shuffle invoices into a priority order. To make certain your invoice is on top of the priority list it is essential immediate contact takes place upon delinquency. If you have a client that you know is experiencing cash flow problems, schedule a courtesy call a few days prior to when your invoice becomes due to verify they will be meeting their obligation on time. This will put your invoice first and foremost on their mind, especially if they consistently receive reminder calls each time your invoice is due to be paid.
If a client continues to place orders and has not made an effort to pay, advise your client all orders are being put on hold until they are able to bring their account current. Do not continue to fill orders for merchandise or services until the account is paid in full, or considerably paid down to a minimum balance due.
It is important to evaluate why invoices are delinquent, there are various reason this may occur. You may have an order that is being returned. There may be an error in an order and the client is delaying payment until the issue is corrected. This is why it is so important to check invoices for accuracy prior to sending them out. If an invoice has a pricing error for instance, this could result in a Net 30 invoice becoming a Net 60 or 90 invoice, thus delaying payment received an additional 30 days. Identify the reason for past due accounts so you can address the situation and maintain a consistent flow of revenue coming in.
Donna Vestre is the President/CEO of South Coast Revenue, a Recovery Consultants Firm based in Anaheim California. To get more information on Credit and Collections, or to submit an article for inclusion in the "Guest Speakers Lounge" please visit http://www.SouthCoastRevenue.com
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