Small business collections is one of the least desirable activities for most entrepreneurs. All too often, a small-business owner is preoccupied with operational issues and does not pay adequate attention to mundane things like bookkeeping and collections. In addition, the bookkeeper, or accounting department, is usually overworked and/or understaffed, and unfortunately, the function of collections drops lower on the priority list.
Procrastination about collections is not good business practice anytime, but during a recession it can be fatal.
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If your business has a cash flow concern, collections is one of the most important areas to concentrate on. In order to keep your business successful, here are some of the things you must have in place for your accounts receivable and collections function:
1.) Staffing. The accounting/bookkeeping department must be adequately staffed. If you have a small accounting department, or just a part-time bookkeeper, you may have to increase the hours worked. Or, you may have to use part-time people, or outsource some work if required. Just make sure your accounting records are kept up to date–daily. This is a necessary expense and must be done in order to keep your collections, and resultant cash flow, viable.
2.) A/R System. Make sure your accounts receivable/collections system is highly functional and easy to use. Sales, deliveries, receipts, adjustments, etc., must be easily, and timely, entered into the system.
3.) Policies and Procedures. Collections policies and procedures must be simple and straightforward–and properly communicated. Everyone involved, especially your collections person(s), as well as customers, must clearly understand what your “terms” are, and what the collection procedure is.
4.) Incentives. Depending on your type of business, discounts or incentives can be offered for on-time or early payments.
5.) Responsibility. Early contact and follow-up should be the responsibility of a designated person(s) in your accounting department. This must be clearly and definitively established.
6.) Owner Involvement. If a customer is not performing as expected, and your collections person is not successful, further customer contact should be handled directly by you, the business owner. If a customer/client is late on their payments, you cannot afford to let payments due get behind schedule–especially if your business has cash flow problems.
7.) Negotiation. In certain cases you may need to negotiate a “work out” plan with a customer who is also having cash flow problems. You want to get paid, but you also want to keep most of your customers who are going through tough times, just like you are. They will be the ones who will be there when you get back in a growth mode. On the other hand, you cannot finance your customers businesses, so you need to establish a payment program with delinquent customers as early as possible.
8.) Follow-up. Review your accounts receivable and collections status daily and do not let procrastination on your part allow customers to slide by on payment due dates. If a customer has made promises to pay, make sure you follow-up on those promises and let the customer know you need the money–as promised.
As mentioned earlier, small business collections is one of the least enjoyable functions for a business owner. Making collection calls can sometimes be a traumatic experience for some, but it must be done–especially in today’s business atmosphere. Collections are often the difference between having your business succeed or fail.