The End of the IOU - Minimizing Bad Debts

Invoicing

You should issue your invoice upon delivery of the goods or completed service (unless you're receiving payment in instalments throughout the project, in which case you can issue an invoice at each point in the project at which payment is to be made).

Make sure your invoice is clearly laid out and easy to understand, and that payment terms are unambiguous. There should be no doubt when payment is due. For example, "Payment is Due on Receipt", "Net 30 days" etc.

If you intend to impose a late payment penalty if the invoice isn't paid on time, make sure this appears on the face of the invoice, along with details of any discount you offer for early payment.

Getting Paid

Most customers will simply pay you when the payment is due. Others, unfortunately, will not. So you need to have an established process to ensure that you get paid.

To begin with, pay attention to your receivables position. Set aside time each week to review and take action on outstanding accounts. This will undoubtedly be one of your least favorite activities. No-one likes calling up debts. But don't put this off: you'll have the best chance of getting what's yours if you act quickly and decisively, before a debt has the chance to become doubtful, let alone bad.

Monitor your receivables and be on the lookout for danger signals:

• habitual slow payment
• broken payment promises
• unreturned calls
• postdated checks

When an account becomes overdue, take immediate action. Establish a debt collection routine and carry it out. Here's a good process you can use to collect overdue debts:

1. Call Customers Whose Payments are Overdue

First off, find out the name of the person responsible for accounts payable. If that person isn't available when you call, find out when is the best time to reach them.

Make sure you get the name of the person who takes the message (this is an excellent way to increase the chance that your message will actually get passed on!), and ask when the person you need to speak to will be available. If the person you need to speak to uses voicemail, leave a detailed, complete message and a clear request that he or she returns your call as soon as possible.

Create a sense of urgency, but be pleasant and courteous at all times. After all, there may be a problem you don't know about -- the customer may not have received your invoice, for example, which sometimes happens if the delivery address is different than the billing address. And if you enclose your invoice in the delivery package that goes to the delivery address, the billing address may never receive it! Or there may have been a problem with shipment. Either way, you'll find out if you make the call.

If there's no good reason why the account hasn't been paid, get a commitment from the customer to pay you today. Expect payment and convey that expectation to your customer. After all, if you don't believe the promise, neither will your customer.

2. The Check Is In The Mail

If you're told the check is in the mail, ask for these details:

• when it was mailed
• the check number
• the amount
• the address it was mailed to

If you believe you're being fobbed off, it's time to escalate things to the next level. Remain courteous and polite, but start pushing for a resolution. If the person you're dealing with says they need to make enquiries and will get back to you, establish a time at which you can call back and follow through. Make sure the other person knows you're not going to simply let the matter go. No-one likes to be hounded, so if it's within their power, they'll make sure you get paid (and off their back).

Other ways to push for a resolution are to make arrangements to send a courier to collect the check, agree on a new payment date, or even agree to their making payment in installments if you believe the problem is a genuine inability to pay (as opposed to mere unwillingness). If, however, you conclude that your customer has the ability to pay but, for whatever reason, is trying to avoid payment, don't offer any compromises. That just sets the scene for a repetition in the future.

4. If All Else Fails...

In most cases, your persistence and firmness in your requests to be paid will result in exactly that. In a very few instances, however, despite your best efforts, a customer will simply not pay you.

Your response to non-payment in these circumstances will depend on your customer's capacity to pay, and the amount of the debt. After all, there's little point in hiring an expensive collection agency or a lawyer to recover a debt that your customer is simply unable to pay. Similarly, you have to weigh these costs against the value of the debt.

Sometimes the best business decision is to simply cut your losses and write the debt off. Naturally, you'll never extend credit to this customer again.

If, however, the debt is significant and you have reason to believe that the customer is capable of paying, then by all means engage a collection agency or a lawyer to pursue the recovery of the debt. In these cases, be sure to include your recovery expenses in the amount that is to be recovered.

Lastly, don't forget your supply terms. If these included a retention of title clause and the goods can be specifically identified as belonging to your shipment, by all means, repossess!