A few issues back we talked about bookkeeping basics and how a
variety of inexpensive software packages will keep track of your
business' receivables and generate invoices and statements. Most of
these packages also provide features for flagging accounts past due and
for generating customized reports. While these programs are great labor
savers, they are designed around some basic rules that apply to the use
of palm pilots and ledger books.
By setting up a regular billing cycle
and establishing payment terms up front, problem collections should be
First, establish a regular billing cycle and stick to it. How often
you choose to generate invoices and review receivables is up to you.
All hours, materials and expenses should be recorded on a daily basis,
as memories tend to fog, and receipts have a habit of getting
misplaced. At the end of each billing cycle, it's time to review the
books, generate invoices and get them out promptly. Statements should
be handled on a monthly basis. In many cases, this means using snail
mail, although some businesses will accept fax or email invoices by
prior arrangement. In any case, it is imperative that all billing and
statements go out as quickly as possible.
Second, be sure to record all payments the day they're received. You
may also want to record postmark dates, and refer back to them if a
payment appears to be past due. This is one way to ensure fairness to
all clients and to avoid embarrassment or ill feelings resulting from
The issue of payment terms is interesting. Over the years, I've
heard some independent contractors tell stories of how they would leave
an invoice at the jobsite after performing their services and that
their terms specified they were payable at time of receipt. I remember
one tower contractor telling me that if payment in full wasn't
presented to him on site at the completion of work, he'd send his crew
back up to begin dismantling the structure.
Whether or not you believe such anecdotes, the inescapable fact is
that we live in an easy-credit world in which most clients have come to
expect net 30-day payment terms. Of course, where written contracts are
involved, you have the right to explicitly specify payment policies,
thus rendering them legally enforceable. Even so, you are the one who
needs to negotiate these matters directly with your clients, and you
risk losing return business if your terms seem too restrictive.
One way of dealing with the 30-day dilemma is to divide scheduled
projects that involve substantial time and materials from routine
maintenance or emergency calls. Allow the regular or emergency billings
to proceed on a net 30-day basis, but set up a specific payment
schedule on project contracts. Such an arrangement might specify one
third of the total quotation up front (after the contract is executed
and work is to begin), another third when work is approximately 50
percent completed, with the balance payable upon completion of the
work. This provides for only one third of the receivable to be carried
beyond the project completion.
Past due accounts and collections
Inevitably, every small business has to deal with the occasional
client that fails to pay his bill in a timely fashion. To begin with,
be sure to issue statements to all clients with an outstanding balance
at the end of each billing statement. If the account is past due, add a
neutral statement to that effect along with a request to contact you
regarding any questions about the account balance. If an account goes
one billing cycle beyond the past due statement, call the client with
notebook in hand. Ask if there was a problem with your services or if
there were any other issues the client needed to discuss. Be friendly
but firm, and try to get some sort of payment commitment. Record the
time, date and contact information as well as the disposition of the
call. You may need these records later. Follow up on these contacts on
a regular basis (no less than weekly) until all issues are
If, after all your best efforts, a client fails to meet his
obligations, you have several options. First, you can have an attorney
draft a simple letter relating the account history and requesting
payment. Expect to pay a modest fee for this service ranging up to
about $100. Another route is to retain a collection service. These
agencies usually work on a commission based on a percentage of the
total collection, but most have a minimum limit for the collection
amount. In cases where the debt is small, you might consider filing
personally for a judgment in small claims court. Rules on the upper
limit of such claims will vary from state to state. Of course, a lawyer
can handle this as well.
These are drastic measures, to be sure, and are generally considered
as a last resort when no further business relationship is anticipated
or desired. In those cases where you wish to preserve a relationship
with a problem client, you may elect to carry his balance at a fixed
monthly interest rate, or you may simply write off the unpaid balance
as bad debt.
Occasionally, you may find a cash-poor client who wishes to barter
or trade with you for services rendered. While taking trade is better
than no payment at all, approach such deals with caution.
Finally, treat all your clients with dignity and consistency.
Remember that checks do get misplaced, invoices misfiled, and that
sometimes the till is just empty at the end of the month. By being
flexible, professional and persistent, you'll frequently collect both
payments and respect.
Mark Krieger, BE Radio's consultant on contract
engineering, is based in Cleveland.