Want to reduce bad debt in your business? Want to get more customers paying you promptly, or at least making regular payments so that you do not have to send them to a collection agency?
Be mindful of the five D’s: dunning, discounts, data, down payments, and documentation.
Dunning – Dunning is a simply another way of describing the billing process. Poor billing practices can kill your cash flow and cause problems with your customers. Some other billing concerns are:
Your bills should be easy to read and understand. All charges should be clearly identified, as well as any payments made towards the balance.
Your bills must be accurate and timely. Many collection issues result from late billing.
Think of the dunning (billing) process as a way to communicate with your customers. What you say and how you say it is important. Does your invoice communicate terms of payment? It should. After 30 days, your invoice should have a “friendly reminder”. Send a collection letter or series of letters with your past due bills.
Discounts – Discounts for prompt payment are a great idea. You can even offer discounts as a way to avoid having to send a file to collection. As hateful as it seems to offer a discount to a customer who is late in paying you, if your next step is to send the file to a collection agency, offering 10% off might be enough to avoid collection, and the rate is certainly less than you would pay an agency.
The most important thing to remember about discounts is that you must remind customers that they are a limited time offer only. Open ended discounts defeat the purpose you are trying to achieve. Clearly state that your offer is good only until a certain date, at which point it will be withdrawn. If you are offering a discount to avoid collection, state that.
Data – The information you collect on your customers is key. Busy small business owners often forget to get more than an address or phone number. As much as well you love new business and want to rush to provide your product or service, take the time to collect information on your customer: address, phone(s), place of employment and email address minimum. If you are going to give a customer credit, they must provide you with information. We recommend a credit application and customer contract, but more on that later.
It is equally important to update customer data. Many “collection” problems are due to the lack of a current address.
Down Payments – Customers who have some skin in the game are more likely to play by the rules. Do not be afraid to ask for some payment before you start the work.
Documentation – I cannot say it enough. If you are going to give credit to a customer, you need a contract. Your contract does not always have to be a lengthy document, but must outline your terms of payment and the consequences of non-payment.
If you apply for a loan, you fill out paperwork. Think like a bank! Use your credit application not only to collect customer data but to document your payment terms and conditions.
Even if you feel you do not have the time, or if your business orders are placed on the phone/online, you still can document the details. For example, I know an electrician who will not take a job unless the customer provides an email. He sends his prices and terms in a quick email, and asks them for a return email agreeing to his terms. Voila, contract!
It is also important to document all payment plans, and as stated previously, terms of any payment discount.