Your Collections Process

Roy is the owner of a small company that sells and installs heating and air conditioning systems. His sales have tripled in the last ten months, but he's noticed that he's run out of cash. How can this be?

The answer is many of Roy's customers haven't paid their bills on time, and he lacks a collections system to handle delinquent accounts. Like many small business owners, Roy saw collections as a business process that would eventually take care of itself. "I hate pressing people for money," he explains. "I thought naively, that if we did everything else right - if we took care of our customers and delivered the right product at the right price - then surely we'd get paid." Roy is learning the hard way that a sale isn't really a sale until you've collected the money.

Avoid finding yourself in Roy's situation by having a collections process in your set of standard operating procedures.

Maintaining Balance

As a business owner, you should create a collection system for your company that balances good client relations with receiving payment for your products and services. And be mindful that, in the USA, the Fair Debt Collection Practices Act protects consumer debtors from unscrupulous collections practices (see below).

Extending credit to customers is a service your business can provide, but with extending credit comes your obligation to ensure that customers pay according to their agreements. Fulfilling this collections obligation is your duty to the business, your employees, your investors, your customers, your vendors and yourself. If customers do not pay as agreed upon, it is unfair to all concerned and multiple relationships will feel the strain.

In a perfect world, no business would need a collections system, because everyone who owed money would pay their bills on time. However, for those living on this imperfect planet, a collection system must be a component of regular business operations.

Do Your Due Diligence

Effective collections begin with your credit standards.

• How do you decide whether or not to offer credit?
• What kinds of limits do you put around it?
• What does a customer have to demonstrate to qualify for credit?
• How do you verify the information they provide?

Answering questions like this up front will reduce the number of problems encountered later. Also, make sure your invoices are going out as soon as you ship your product or deliver your service. The time lag between product delivery and arrival of your invoice will set an expectation in the customer's mind as to how promptly they have to pay.

Every account has its own background story, so before an account transforms from delayed to overdue, you'll want to identify collections actions appropriate to each client's situation. Some customers may have misunderstood your original credit terms. Others may turn out to be chronically slow payers, severely overextended or saddled with seasonal difficulties.

Your Collections System

Think of your collections process as a regularly-occurring set of steps, rather than a one-time event. Collection systems that produce consistent results are sets of documented, repeating activities. When a customer account goes from 'current' to 'aged', a good accounts-receivable system should cue your collection system to kick into action. A simple example;

• If your invoice is payable in 30 days and has not been paid as of day 31, send a standard letter and email reminding the customer of the amount due.
• Follow up with email and phone calls on days 35, 37 and 39.
• Be prepared to send additional messages, make additional calls and persist in your efforts to collect.

Teach employees that your business is committed to work with customers to help them meet their own financial obligations. Show employees how to approach clients carefully, and to offer multiple options and strategies for resolution.

Have employees use benchmarked "discovery and response" scripts, appropriate for customer circumstances. And be sure that all contacts and contact attempts are documented, so that the effectiveness of your collections process can be tracked.

Finally, consider outsourcing your collections to an outside agency. If you lack the expertise or manpower to do collections, an outside vendor can be an attractive option. They often work on a percentage of each account, which can work in your favor if they can collect significantly more than you.

Think Helpful

When client payments are late, maintain your professionalism and offer yourself as a helpful partner, willing to assist the customer in solving their payment problem. Let diligence (constancy of effort following through to resolution) and empathy (identification with your client's situation) be your guideposts as you create a collection system. Remember;

• A sale isn't complete until the money is collected
• Past due accounts put the business and the client relationship at risk
• Develop an orchestrated system that responds to aging accounts
• Create a system that responds appropriately to each client's situation
Make sure your system conforms to Fair Debt Collection Practices Act guidelines

Be understanding and hear the client's story, but continue to insist on proper discharge of the debt. Give customers a chance to explain, listen actively and remind them of their agreement to pay. Strive to help them do what they agreed to do in a way that works for you both.

When you're talking to the right people in an honest and thoughtful manner, you are more likely to get paid, and more likely to strengthen your customer relationships.

Additional Resources

Fair Debt Collection Practices Act

• Summary
• Full Text (.pdf)