Steve Harms

Thursday, August 18, 2011

Collecting Past Due Money: Red Flags to Watch For!

Keeping a steady cash flow is difficult in good economic times and a real challenge when recessionary pressures set in. Since cash flow is critical to payment of your company’s own bills, a cycle of events occurs, starting with your customers’ commitments to pay your company’s invoices timely. In other words, a domino effect occurs when your customers fail to pay your company on time—resulting in your company’s inability to pay its creditors on time.

To keep your cash flow positive and sufficient to cover your company’s bills, you must implement some general controls as part of your credit policy. Some advice:

* Be aware of slowing payments. I can’t emphasize this red flag enough. Watch for any signs of deterioration in paying habits. While one late payment may not break the bank, it is significant as it shows a disregard of your company’s payment terms—such that even one late payment does justify a polite nudge to the customer. The nudge may take the form of a “thanks for the payment” compliment combined with a gentle reminder of the terms—“please keep in mind the terms are [whatever the terms are, such as net 30].”

* Be ready to respond to customer bad habits. Communicate with your customers. Let them know slowdowns in paying habits aren’t acceptable, and prompt them to make payments. Once a second payment late, for example, inform them that you may have to take steps to correct late payment habits, such as the temporary suspension of credit terms.

At the early stages of payment slowdowns, you can be intentionally vague about what steps you may take, especially if you don’t intend to take stronger action at that point. Your customer will still get the message.

* Be considerate, yet firm. No need to panic and ruin a relationship . . . yet. Your communication at this stage is still very polite, yet firm enough to convey dissatisfaction—such as notifying your customer that a privilege, such as favorable credit terms or 24/7 availability of goods or services, may have to be suspended until confidence in prompt paying habits is restored.

* Be prepared to reduce a line of credit, require COD (cash on delivery), or cut off deliveries or services. If invoices are being paid slower and slower, don’t get yourself in any deeper. You don’t want or need the added credit exposure.

Let your customer know that you’re following established credit policies (discuussed in detail in Chapter 2) that require specific responses to deterioration in paying habits, including reduction and possible elimination of credit terms. The old standby: “It’s nothing personal – it’s just business” approach can help you avoid sending bad vibrations to a customer you’re simply trying to nudge back on track.

* Be honest in your communications. Although some consider bluffing to be an acceptable tool in business, it’s not effective a second time, and perhaps not even a first time. If you threaten to take action if you don’t get what you’ve asked for, be prepared to do it.

If you notice a decline, step up the pressure for payment, as discussed in Part II. Notify the appropriate people within your own company that they may experience a slowdown in cash flow. If the account is substantial, they may want or need to adjust the company’s expenditures in advance of encountering financial problems. Adjustments may include delaying discretionary purchases or employing free interns from local schools, rather than hiring more hourly help.

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