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Home>Business Resource Center >Financial Articles >Taxes and Accounting

Optimize Collection Efforts

Ask average business people their least favorite activity, and other than firing employees, most will say "collecting overdue invoices." For most people it's awkward, uncomfortable, and as a result, usually avoided if at all possible. The problem is outstanding receivables can cost a business money and greatly impact cash flow and bottom line results.

The key is to put a process in place that de-personalizes collection efforts while maximizing your ability to be paid the money your business is owed. First check out the articles Credit Checks and How to Manage Accounts Receivable for information on qualifying new customers and creating processes to help you get paid on time. Then, here is what you can do:

• Establish and provide written terms. Bills of sale, contracts, invoices – any agreements should clearly specify the terms extended to customers. Spell out not only when you expect to be paid, but what happens if you are not paid on time. Consequences could include penalties, interest charges, suspension of services, and formal collection proceedings. In short, make sure customers know and understand your expectations.
• Establish progress payment terms. Keep track of work performed, goods and services rendered, and bill on a pre-established schedule. If necessary, don't provide further services until prior invoices have been paid. This is especially important for long-term projects or engagements.
• Contact slow-paying customers immediately. Don't wait – some will not make payment arrangements until you contact them.
• Consider being flexible, especially with long-term customers. Almost every business occasionally struggles; if you have developed a long-term relationship, try to find ways to work with the customer while they overcome short-term cash flow issues. Before you do, decide ahead of time how long you're willing to wait and how much you're willing to bend, and let the customer know exactly what you are and are not willing to do.
• Bring in the experts. In some cases you may have to enlist a collection agency. Agencies typically are paid by:

  • A flat fee or set amount per invoice or account
  • A percentage of the amount they are able to collect
  • Purchasing the debt owed to you; typically for 10 to at most 20% of face value (their hope, of course, is to collect more than what they paid to purchase the debt)

Flat-fee arrangements are less common than percentage arrangements; a collection agency working on a percentage is only paid if they are able to collect some or all of the debt you are owed. Always set a defined time period; that way if one collection agency is unsuccessful, you might engage another – or take over the function yourself.

If you use a collection agency, make sure to shop around and compare both price and service. Some agents use aggressive, even confrontational tactics to collect debts – those techniques could, even if indirectly, reflect on your business. Ask for samples of the letters they have sent in the past, and ask for a description of their standard operating procedures.

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