A few days ago I was having a conversation with someone about what other career path I would pursue if I sold my business or suddenly found myself in need of a job. I thought about what other skills, besides sales, that I have developed after running my own business for the last 11 years and came up with accounts receivable manager.
This idea would surprise many, including myself, because I disliked getting involved in money matters when I was in sales. I distinctly remember being instructed by a professor in college that taught a salesmanship class that sales people should not be involved in collections. Whenever my bosses would ask me to talk to a customer about past due invoices, I would say that they shouldn’t put me in that position. Their response was that there wasn’t anyone who had a better relationship with that customer than me, so I needed to ask for my contact’s help in getting paid. They were right in that – I had to admit. Much of the time, when I inquired with the customer about the problem, I was told that the person doing collections for my employer was rude or something along those lines. The solution often involved me promising the accounts payable person that I would personally handle any collection questions in the future. In doing this, I quickly learned that the accounts payable person was just as important to get to know and build a relationship with as the buyer. As a salesperson, you would never think to be rude, insensitive, or overbearing to your buyer for fear of losing their business, so why would you treat the person who signs the check any differently? Ever heard the saying, “You attract more flies with honey instead of vinegar.”?
When I started my own business, I kept that same philosophy when it came to collections. I decided to be cautious going in and check credit references on new accounts that wish to pay on terms. If the references indicated issues, I would approach giving credit with caution – sometimes telling the customer that I could not give them terms at this time. C.O.D. or credit card would be accepted. I felt that extending too much credit to a risky client wasn’t a risk I was willing to take – especially early on when cash flow was so critical.
I decided that my “policy” for collections would begin when a customer was two weeks late with a payment. I would give the A/P person a call to inquire about the status of payment on the invoice and to make sure as to whether there might be any issues with the invoice. This phone call is always curtious and professional. Based on what I was told, I would follow up again if the check had not arrived within a few days of when they promised to send it. If an invoice went more than 30 days past it’s due date, I would be sure to point out that fact and ask for the A/P person’s help in getting the matter resolved. This would continue until it was either paid or the invoice reached 60 days past its due date. The phone calls would be made about once a week. I rarely have a collection situation go this long. (Maybe 2-3 a year.)
I listen and pay attention to what the A/P person says as to the reasons for late payment. Since I am a low risk taker, when I hear comments about how bad business is or that there are financial problems, I often make the decision to cut off credit to that customer or at least reduce the credit limit. I also weigh in how often and how long I have had to work hard to collect payment. There are some people that just pay a little slow all the time every time. When the pattern breaks for the worse, I see that as a red flag. I recommend you use your own judgement about what is acceptable and workable for you. Larger companies with loads of cash may be less concerned about allowing companies to stretch them out as compared to a small business with a tighter cash flow.
When a past due total reached the 90 day point, I moved to written correspondence. I would send a certified letter to the accounts payable person and the registered agent for the company (a registered agent is the person that is listed as the principle of the corporation or LLC with the Secretary of State in your state, which is public information) detailing the past due invoices and set a deadline for payment. I would attach copies of the invoice, signed delivery receipt, and customer statement. I recommend at least a two week time frame for the deadline. Since most of my invoice amounts are lower than the allowed amount eligible for small claims court in my state, I indicate that if payment is not received by the deadline, I may be forced to file a claim in court. You don’t want to be rude or too threatening here. You still want to encourage them to help you resolve the matter without having to go to that extreme.
If I still did not receive payment by the deadline, I would go online to the Small Claims Court in my district and print out a claim form. I fill it out and attach copies of all the documents and take it to the JP office. There is a fee to pay for filing the claim and to have the registered agent served. It varies from county to county, but should always be way less than the cost of an attorney. Usually within a week, the customer is served a notice by a constable. This action may seem pretty serious to some, but it has been extremely effective for me when I have been forced to do so. It is rare. I think in 11 years I have filed a claim no more than 4 times. Most people will pay you before it gets that far. I can tell you that I have never had to appear in court. Once a Justice of the Peace gets involved and requests a response from the defendent, the customer will pay you. In all 4 cases, I was paid in full by the customer and settled the case before the court date.
It is my experience that most accounts payable managers will instruct their personnel to stretch where they can. I am often surprised when I learn that a company lets their customers pay in 2-3 months and be okay with it. I am less surprised when they then have financial pressures of their own. There is another old saying, “The squeaky wheel gets the grease.” If you don’t make an effort to collect money when it is past due, it will become a problem for you later on. Writing off bad debt is not a tax deduction I wish to take yearly. Do you?
Kim Lawrence (aka The Tapelady)
