Small business owners work really hard to gain new business. Every new business relationship begins with the expectation of payment, so when payment is not received, it feels like a betrayal. How do you juggle your need to grow your business with the need for cash flow from receivables? How do you determine why customers are not paying and what do you do about it? Is there a way to collect money owed you and salvage the client relationship?
Bad debt collection and customer retention are not mutually exclusive. It is possible to manage delinquent customers if you have a consistent plan:
- Start every relationship off the right way with a good contract that outlines all payment terms and the consequences of non-payment. Do not look at a customer contract as proof of lack of trust or as a negative way to begin a business relationship, but rather as a great way to make sure all parties are on the same page from the start. Great relationships begin with great communication.
- Set a credit limit for your customers. You may give your largest or most promising clients more credit than others.
- Every month, review your accounts receivables and follow up with them diligently. Polite reminder phone calls and well crafted collection letters can work wonders.
- Perform “triage” on all customers over 90 days past due. Make two piles: customers you are willing to ride it out with a little longer and those that need to be sent immediately for outside collection. There is a big difference between a client who responds to your calls and asks for a little more time and a customer who totally ignores you or flat out refuses to pay. Decide which customers you wish to keep and wish you no longer wish to have as customers.
- For files you wish to send for outside debt collection, decide which customers (if any) you would take back once their bill is satisfied. Let your collection agency know as they may be able to use the information to get the bill paid. We strongly recommend not providing new services to accounts that have been sent for outside collection until balances are paid in full.
In the end, it all comes down to communication with your customers and a consistent plan for tracking the money owed to you. Good customers will appreciate your discipline and fairness, and those who do not work with you may not be worth your time for the long term.
Would you like some tips to avoid bad debt in your business? We have them!