Operating a business today usually means you are providing credit to your customers to purchase your product or service. Common practice is to give 30 days to pay and sometimes provide them a discount if they pay quickly. In theory, this should be simple! In reality, it can lead to a very difficult situation. What happens when the customer does not pay in the timeframe outlined? “No problem” you may think, “I will charge them interest until they do.” But what happens when another 30 days go by without payment? You completed the work in good faith, so what could be the problem? Before you know it, another 30 days go by… If this sounds familiar, you are not alone.
Accounts receivable management is an extremely important part of your business. Here is a checklist of items to consider to ensure you are prepared:
- Do you have a written policy/engagement letter signed by your customer agreeing to the terms? You need this document in case you need to take legal action in the future.
- Do your employees understand your policy and are they able to explain it clearly to your customers? Providing incorrect information to a customer could lead to future disputes and foster a war you cannot win.
- Do you have a procedure to follow-up with non-paying clients? Follow-up phone calls and emails are a necessary evil. It can be very uncomfortable, but you owe it to yourself to value you the work you completed. The first call could be to ensure the client received the invoice. The second call will be to ask for the status of payment. The next step could be a demand letter, and failing all else you can take legal action. Keeping good records of your attempts will help support your action against them. If you choose not to call your own clients and have one of your staff make these calls, make sure they are prepared with a script and have the right demeanour. Poorly handled collection calls can result in lost customers.
Keep in mind that the easier you make the payment process, the higher the probability that you will be paid. Its common practice to accept, cash, cheque, credit card, electronic fund transfer (EFT), and Apple pay. While some of these options increase your costs, they can be be factored into your prices.
In Ontario, you cannot wait years to decide you want to take legal action. After two years, the account is considered to be statue barred thus your chance of winning a legal battle is extremely low. Thus, time is of the essence is the collections process.
Proper handling of accounts receivable leads to improved cash flow, which can reduce your reliance on credit lines, allow you to reinvest more quickly in your business, and creates a competitive edge over your competition. Ensuring you have the proper procedures and policies in place will help ensure you maintain control in a difficult situation.