The Delicate Art Of Getting Paid

Collection problems are inevitable--but manageable

John C. Arensmeyer faces a constant conundrum: How to get customers to pay on time without chasing them away. Since most clients of ACI, his $2 million Sausalito (Calif.) software company, are major corporations, his invoices often wind up in a black hole of bureaucracy. Some 45% of payments average 30 days late, making it hard to pay his own bills. Still, Arensmeyer hesitates to come on too strong. "I don't want to harm the relationship," he says. "It's a very difficult line we walk."

Sound familiar? Whether it's because of inefficiency, a bad quarter, or conscious policy, service businesses are paid an average 31 days late, according to the Credit Research Foundation in Columbia, Md. That can be treacherous for smaller enterprises, which often can't keep the cash reserve of 1% to 10% of sales needed to cover revenue shortfall.

But you don't have to roll over. Speeding up collections isn't impossible.

"GOOD OFFENSE." The first step is to set clear ground rules in contracts. Specify the consequences of late payment--interest of 1 1/2% per month, for example. Or try the carrot: a 2% discount for bills paid within 10 days. If you sell a service, ask for a percentage up front. If you sell a product, get partial payment immediately--especially important for customers in bumpy businesses like construction.

You should also get to know everyone in your clients' accounts-payable process. "You don't want to be a stranger when your bill arrives at the head office," advises Michael O'Horo, a small-business consultant in Washington.

Don't forget to enlist your own employees in the fight, either. Tying commissions to final collections encourages sales staff to find reliable customers. Or, like Ronald Schneider, finance vice-president for Motif Design, a distributor of wallpaper and fabric in New Rochelle, N.Y., you can spur the collections staff with incentives. When he began offering his three-person department a $400 shared bonus to meet a monthly goal, outstanding receivables fell from an average of 61 days to 42 days.

The most important step you can take, however, is setting up a system in which impartial employees--those with no day-to-day relationship with the customer--contact late-payers and then follow up. "The best defense is a good offense," says Carol Lopucki, director of the Michigan Small Business Development Center at Grand Valley State University in Grand Rapids.

In service businesses, where relationships are the bread and butter, increasingly insistent calls are usually best. Typical is the approach used by Carolyn B. Thompson, president of Training Systems Inc., a management consulting and training company in Frankfort, Ill. After 30 days, she makes a friendly call suggesting that an oversight caused late payment. Then, she faxes a copy of the bill. Next, she sends a past-due invoice, with a polite note. Two weeks later, she'll call again, to uncover the cause of the delay ("What can we do to help get this resolved?") and propose an alternative payment schedule.

When is enough enough? That depends. If your gross profit margin tends to be high--say, 50% or more--it's probably worth extending longer-than-usual terms. Similarly, you might bend the rules for a long-standing client in short-term trouble or one that's just too big to dust off. And don't rely on what the books say about the average age of receivables; the real number depends on the needs of your business.

Still, after 120 days, you should generally consider the client a goner. That might mean hiring an outside collection service or, as a last resort, suing. If the debt is less than $20,000, however, the cost of litigation could wipe out whatever you're seeking to recover--and leave you with an unwanted reputation for litigiousness.

Indeed, no matter how hard you try, admitting defeat is sometimes the only solution. Says Motif Design's Schneider: "You just have to eat your losses." And never stop looking for new customers.

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