Why You Need To Get Serious About Your Startup Debt Collection Efforts
Bottom line is that you’re in business to make money. If your customers aren’t paying you, that’s a serious cash flow problem. If they’re slow to pay, that’s a problem as well. While late invoices are fairly common for many businesses, that doesn’t mean you can’t fight it. The key is process. There are a few steps you can take to improve your collection process to expedite payments and maintain control over your cash flow.
Here are 9 ways you can improve your cash collections and proactively manage the financial health of your company:
1. Establish process. Your accounts receivable are your company assets. You need to choose the best process for managing your company’s accounts receivable, but whatever method you choose, be sure that you: create a record of all sales and receipts, have a system in place for generating invoices on an ongoing basis, and keep close track of account balances, both current and overdue.
2. Create policies. Before you sign on your first customer, you need to have established your credit policy. This policy should cover your credit policies, accepted methods of payment, interest charges, etc. You should also establish clear billing policies, including billing terms and billing frequency.
3. Clear invoicing. This might sound basic, but you’d be surprised at how many startups neglect to have clear, itemized invoices for their clients. Invoices should include your business name, where to direct the payment, and contact information for billing questions. If you don’t tell your customers how much to pay, and when, how can you expect them to pay?
4. Timely invoices. You should have a set invoicing schedule and send out your invoices, in the form of monthly statements, as soon as money is due. If you don’t receive payment by the payment deadline, don’t wait until the next billing cycle to send out an invoice reminder. Stay on top of your invoicing and send out an immediate reminder. If you’re working on a big project for a client, you may want to set up a billing cycle rather than wait until the end for full payment. Statements also provide you with good documentation in the case that you need to ever send an account to a collection agency.
5. Proactively manage your accounts. Your accounts receivable process should include a regular review of accounts. This will help you to identify and manage aging accounts, those that are past due. Have a system in place to deal with those accounts that are 30, 60, 90, or more days past due.
6. Call. As with most business communications, a simple phone call can be the most effective means of communication. It’s harder for your client to avoid payment when you have them on the phone.
7. Call again. Nobody wants to be a nudge, but sometimes one call is not enough. If you want to be paid, you need to be persistent. You’ve provided your product/services; now it’s time for your clients to keep up their end of the bargain. Repeated calls are not a nuisance; they’re the price of doing business.
8. Discounts for fast payment. Some companies will choose to offer customers a discount for fast payment as an incentive. If you decide to go this route, a token discount is plenty, say between 1-3% for payments received within 1-2 weeks of invoicing.
9. Use a collection agency. Some people believe in going to debt collection after 90 days. There are pros and cons to this (check out this article on 10 Tips for Entrepreneurs Thinking about Using a Debt Collection Agency). I believe that before using a debt collection agency, you want to make sure you understand the associated costs—both the financial costs and costs to your customer relations. That said, the longer a bill goes without paying, the less chance you have of it ever being paid.
Your accounts receivable are an essential piece of your financial equation. If you don’t keep up with your receivables, you’re putting your business at risk. But an established and consistent collection process will help you to avoid a cash-flow situation.
Liked this post? Subscribe to our newsletter to get our posts on startups sent directly to your inbox.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of outsourced accounting, finance, tax, valuation, and corporate governance services to companies at every stage of the development process. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.