Few things are more frustrating for a small business than dealing with clients who won’t pay for the products or services you’ve provided. It’s tough enough to manage cash flow. But when money isn’t flowing in as you had planned, slow payers can jeopardize your business. If you invoice your customers, you also need a sound strategy for collecting A/R.
Understanding Small Business Debt Collection
One of the services many businesses provide is delivering products or services and then billing for them later. If a client refuses to pay, doesn’t pay on time, or can’t afford to pay their bill, this can be challenging for all involved.
You’re more likely to eventually get payment from a client that is late or having cash flow issues than one that doesn’t want to pay you at all. But, not all business debts are the same. A past due $200 debt from a long-time client isn’t equal to a new client’s $10,000 delinquent debt. As you approach collecting accounts receivable, you’ll want to consider the circumstances of each case.
Strategies for Collecting A/R to Increase Your Bottom Line
Whether a past-due debt involves someone you know personally or a new client that you’ve had a bad experience with, you have every right to collect the money your business is owed. Here are some of the steps you can take to increase your A/R collections and boost your bottom line results.
1. Set a Payment Policy
The first thing your business should do to protect its interests is to outline a payment policy. How long do clients have to pay their bills? What methods of payment do you accept? Will you give discounts for early payment or charge penalties for late payment? Create a contract that clients and vendors will sign before you agree to invoice them for products or services.
2. Ensure Accurate Accounting
You won’t be able to collect A/R timely if you aren’t keeping accurate records. By keeping detailed and timely accounting records, your company can quickly identify and address delinquent accounts. Further, you can give clients any information they request about the status of their accounts, including payment due dates.
3. Follow Your Policy
Once you have a payment policy in place, follow it. When a client is delinquent, contact them immediately and consider placing a hold on any further purchases. Send a written past due notice that includes the amount due, as well as any interest owed or late fees.
4. Stay Within the Law
You should understand your rights but not go beyond the law when attempting to collect a debt. For example, it’s unlawful to harass, threaten, or intimidate a client, and it’s bad for business. You are likely bound by some state laws, but anyone you hire for help (law firms or collection agents) will be subject to the Fair Debt Collection Practices Act (FDCPA).
5. Document Everything
As you work on collecting A/R, carefully and thoroughly document your efforts. You should keep documentation of every email and letter you send as well as note the dates and times of your phone calls or in-person meetings. These logs, as well as your accounting records, will act as your primary evidence should you need to take the client to court.
6. Use Your Judgment
Every debt is different, so use your judgment as you attempt to resolve each one. You may wish to negotiate some debts with clients for either a reduced one-time payment or extended monthly payments. If this isn’t an option, you can take some clients to small claims court if the debt falls under a certain threshold.
If you are overwhelmed handling your company’s finances, Orcutt & Company can help. Our team of accountants, bookkeepers, payroll specialists, and financial advisors specialize in helping small businesses consolidate and simplify their accounting services. Contact us today to learn more about our full range of services.
