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How to Collect from Clients

Collecting payment from clients is a matter of negotiating terms in advance, separating collection and business functions, and keeping internal accounting systems in order.

Very few entrepreneurs begin their business ventures with the goal of becoming collection agents. Unfortunately, some of us have found ourselves in this unwelcome role. Developing a consistently successful accounts receivables program does not have to be daunting. By following some time-tested guidelines, you can implement a "win-win" strategy that gets your invoices paid on time and allows you to maintain positive, long-term business relationships with clients. Here is how to do it.

Money Talks, and So Must You

Why do some business owners seldom, if ever, complain about past-due balances, while others spend significant time on this problem? Much of the answer begins long before an invoice is sent. One of the most valuable changes you can make in your accounts receivable process is to define payment expectations with your clients in advance of services performed. You can also enter into a formal agreement that includes a sum to be paid up front, and then verbally review what you will do for the clients. Here's how:

  • Establish financial boundaries. Discuss money during your first meeting with a client. Explain in a clear and concise manner exactly what you will do for the client, while clearly stating your compensation terms. Your clear communication during this meeting is essential because it establishes important financial boundaries with the client.
  • Formalize an agreement. The boundaries discussed at the initial meeting should be documented in writing. In an agreement, list the specific services to be performed or work to be delivered and the estimated cost of the services or work. This agreement should explicitly state that your client owes you money for work performed or services rendered. The agreement should also specify the terms of payment, including the payment you expect in advance.
  • Request money in advance. If it is the accepted practice within the industry, business owners should request a portion of their money inadvance. Using the terminology of the industry is important, such as "deposit on hard goods" or "retainer on services." This allows the client to understand you are asking for something that others ask for as well.
  • Review verbally. Review the agreement with your client before signing. This will enable you to reinforce the financial obligation that the agreement specifies. You can also use this review to inform your client about the value of your work. Tell the client exactly what you are providing for a specific dollar amount, and therefore defining the client's expectations. There should be no question at the end of your meeting about what is being delivered, when to expect it, and how much it will cost.

Do Not Make Collection Calls

Your next step in the accounts receivable plan is separating yourself from the collection process. Your business role now becomes fostering a long-term relationship with your client. This involves two steps:

  • Designate an agent. It is imperative that the task of reminding clients to pay their bills, as well as more advanced collection activities, be undertaken by someone else in your office, such as an office manager or administrative assistant. You might also hire a third party to handle the job.
  • Distance yourself. When you have designated an individual to serve as your accounts receivable manager, you can distance yourself andyour business role from the collection function. If a client calls you to complain about a collection call, you can respond with acomment such as, "I'm glad you contacted me. I'll talk to my accounting department about this. I'm sure we can get it straightened out." This separation allows you to maintain a different image in the mind of the client.

Stay on Top of Your Invoicing Game

This brings us to your internal accounting procedures and how they affect your accounts receivable plan. The rule here is: keep your side of the street clean. Here's how:

  • Set billing standards. Do not expect your client to pay an incorrect invoice, or to pay the invoice on time if it is sent out late. Allow ample time for your clients to meet your agreed-upon payment terms.
  • Set accounting standards. What is the best way to ensure accurate and timely invoicing? Consider the method you now use for billing your clients. As your business grows and changes, look for an accounting system that provides features such as automatic updating of customer and inventory balances and flexibility for modifications.

Solve Your Accounts Receivable Problems Today

Having involved yourself in setting the payment agenda, distanced yourself from the billing process, and put your internal systems in order, the final step is collecting from slow-paying or nonpaying clients. This requires you to be especially delicate. Follow these steps:

  • Use late-payment fees. While it is almost impossible to collect late-payment fees in a commercial business relationship, you might use them as a tool that brings a collection problem to light. When negotiating for payment, you can say, "If you overnight your payment tous, we will remove all or part of the finance charges" that will occur after 60 days.
  • Bring payment issues to a head. For really stubborn payers, it may be necessary to confront the problem directly. The best time to do this is at the most critical stage of the client's project. Make it clear that a delay in payment is forcing you to stop work on the project so that your business can survive.
  • Consider arbitration. When it comes to legal action, only the lawyers make out in most cases. You would better call for arbitration when an agreement or contract is disputed. This is less costly for both parties, and allows issues to be resolved faster.
  • Stay calm, be fair. Treat clients as you would expect to be treated. Stay calm at all times, repeat options verbally and in writing, and consider compromise. Most clients who want to do business with you would rather keep you happy -- and paid.

From: EntreWorld | March 1998 By: William H. Mills

William H. Mills is president and chief operating officer of Software Business Technologies Inc., and its subsidiary, SBT Accounting Systems.

 

 
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