It’s that time of the year… time to pack up and head out for your summer vacation. However, if you’re like many owners of closely held businesses, this is sometimes easier said than done. If important things seem to grind to a halt when you’re out of the office, it may be time to consider developing processes in your organization that aren’t dependent on your being around. In other words, get the business out of your head and on paper in the form of policies and procedures that your trusted employees can administer.
But, you only have two weeks until you leave for Disney? Then start small and document and implement a credit and collection policy that will work for your company even while you’re not.
Create Accountability in Your Organization
The first step to take this responsibility off your plate is to identify someone in your organization to be the Credit and Collection Administrator. Next, you must provide them with the clear responsibility and authority to manage this area (under your supervision of course).
The Credit and Collection Administrator’s responsibilities should include but not be limited to the following:
- Ensure completeness of customer records
- Develop and update your credit and collection systems and policies
- Field phone calls from customers
- File mechanic’s liens if appropriate
- Evaluate new customers and their credit limits
- Oversee and execute collections efforts
- Provide you with reports and key performance indicators
Qualify your Customers
One of the first steps in an effective credit and collections is to make sure that a new customer understands not only what they are required to pay for your product or service, but also when. If you deal with large transactions or balances, you may elect to obtain a signed credit agreement every time a new customer is brought in and take a less formal approach for smaller accounts. The important thing is to define your policy and stick to it.
A formal credit approval process will remove much of the guess-work involved with who to issue credit to and at what level. For example, you could create a tiered approach in your organization for credit approval. Perhaps the sales force can automatically extend credit up to $2,500, while a larger approval may require sign off by the credit manager, controller, or someone higher in the organization.
In any event, you want to make sure you have a clear internal process to authorize credit terms for customers. Then ensure your customer understands the terms and how they might lose their credit privileges.
Identify Customer Problems Quickly
Time is not your friend when dealing with delinquent accounts. The earlier collection efforts are started, the better the results. Be sure that a periodic aging of customer accounts is prepared and distributed to key members of management to identify accounts that are over 60 days old.
In addition, you want to ensure that your credit professionals can identify potential red flags of fraud or other problems when they see them. Some examples are:
- Your primary contact no longer works at the company
- Company ownership has changed
- The customer has only been in business a short time and has a credit record or financials that look too good to be true
- Credit references do not answer the phone with the given business name or are answered by an answering machine.
- A well paying company has suddenly slowed payments or built a large balance
- Broken promises (i.e. the checks in the mail)
- Balance for customer is at all-time high and a large order is placed.
As a business owner, you have to be flexible and maintain good relationships with customers, but also limit your exposure. Remember, you are not your customer’s bank. Beware if you have to constantly deviate from your credit policies for particular customers.
Collecting on delinquent accounts
Prompt action on delinquent accounts is your best collections tool. Another valuable tool is an overall policy for timing of collections and follow-up. Some companies choose to adopt a polite and courteous “Squeaky Wheel” policy, so that the customer chooses to pay the company before its other creditors. Depending on your industry, this may or may not be an appropriate approach. The key is persistence and timely follow-up on delinquent accounts. If you are not receiving payment, you want to know why. Is there a dispute? Is the invoice incorrect or confusing? To speed collections, problems with product and billings must be resolved as soon as possible. Also remember to document, document, document. Don’t be afraid to remind a customer that they told you that the “check was in the mail” last week.
What to Do When You Can’t Collect
When all of your internal methods of collection have been exhausted, you may wish to use collection agencies or attorneys. Since this likely will damage customer relations, it is usually a method of last resort. Before turning an account over to collections, you will want to be sure that there is little chance of doing future business with the customer.
When preparing to take an account to collections, documentation is the key (remember document, document, document above?). You will want to be sure you have copies of unpaid invoices, details of all charges and payments including interest, credit application, and copies of any other contracts signed by the customer. You will also want to provide all communication with the customer and any internal notes to the file
Write-Off of Bad Debts
No matter how well you design and implement your credit and collection policy, you cannot protect yourself from the inevitable bad debt. However, to protect yourself from writing off accounts that are still collectible, or in the collection process, you should implement a formal policy defining when an account should be written off.
In the mean time, you should maintain an allowance for bad debts on your financial statements. A periodic review should be made to determine the adequacy of the allowance for doubtful accounts in relation to your accounts receivable.
Enjoy your Vacation!
If you begin to develop a sense of accountability and responsibility in your organization with a structure of effective policies and procedures you are comfortable with, you will be amazed at the results.
Start small, you can’t do it all immediately. But, do start. Remember, you only have two weeks left until Disney!!
