The old adage “time is money” is not just a figurative saying; when it comes to collecting past-due invoices, it’s literal as well. According to the Commercial Law League of America, the longer you wait to go after money that’s owed to your business, the less likely you are to collect it. About a quarter of receivables become uncollectible at three months delinquent, more than 40 percent at six months, and fully three quarters at 12 months past due. “A small collection problem can become a large collection problem quickly if it is put on the back burner,” warns Jill S. Marks, an attorney at Sage Law Practice Group, PC, based in Hampton, Virginia.
Uncollectible receivables represent a total write-off to the creditor, the worst type of all collections-related losses. But there are also costs associated with invoices that are eventually paid but well past the due date. This is known as the time value of money, and the formula to determine it is PV=C / (1 – Cost of Capital); PV is the present value of the amount owed, C is the cash collected, Cost of Capital is the business’s annualized cost of money or expected return, and n is the number of periods in the future the collection occurs.
More detailed information on the time value of money can be found here, but what it really boils down to is that “cash is fungible—if it doesn’t come from one source (accounts receivable), it’ll have to come from another,” says Mitchell D. Weiss, adjunct professor of finance and a board member at the University of Hartford’s Barney School of Business.
Insufficient collection efforts often are the beginning of a company’s cash flow constraints, says Clint Sallee, president of Fidelity Creditor Service, a collection agency based in Glendale, California. Another old adage is “the squeaky wheel gets the grease,” and in this context it means businesses are more likely to get paid when they take a proactive approach to collections. “Once you know that the customer is not going to make prompt and complete payment, don’t wait for something magical to happen,” Sallee advises. “Get proactive. Escalate the issue internally or up the chain of command at the debtor’s company—or both. If that doesn’t work, consider your external options.”
Elliott M Portman, an attorney and partner in the creditor’s rights department at Roe Taroff Taitz & Portman, LLP in Bohemia, New York, suggests these best practices to improve collection efforts:
- Speed up the payment cycle; for 30-day accounts, call on day 31.
- Tone and tenor are essential; don’t apologize about asking for what is legitimately due you.
- Get credit card information when an account is opened; faster payment can offset transaction costs.
- Make sure invoices are correct and complete.
- Understand client payment cycles; time your invoices to arrive a few days prior to the day they issue checks.
- Add payment options such as online.
- Get invoices out faster; on large jobs, invoice segments as completed.
- Know your customer’s stress points; if you are their key supplier, remind them during the collection call.
- Revoke credit privileges for customers who default on terms.
Of course, business owners don’t want to alienate or offend customers unnecessarily, and that can be avoided by using a customer service approach on the first delinquent account call, suggests Jeff DiMatteo, president of American Profit Recovery, a Marlborough, Massachusetts-based collection agency with additional offices in Michigan and North Carolina. “Let the customer know you care and want to know if there were any issues with the service or product.” However, if the customer cuts off communication, that’s a red flag signaling it’s time to implement a more assertive approach. “If diplomacy is important to your business on your aged debt, make sure the collection agency you have working on your behalf is in line with your business values,” adds DiMatteo, who is also president of the New England Collectors Association.
Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.
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