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How To Minimize Future Collection Problems

Guest post by: Leonard Sklar

Article Overview: Learning how to recover more of what is currently owed is a highly productive process. Learning to avoid collection problems from future business also makes a lot of sense. This article describes exactly how to clarify the expectations about payment so that customers are not only far more likely to comply but also will become more appreciative of you as a supplier of your product or service. This strengthened relationship often leads to a wonderful bonus; namely, more referrals from happy customers.

How To Minimize Future Collection Problems



It's a rare business that can demand payment in full - up front - before providing its product or service. For the overwhelming majority of businesses, from the sole proprietor all the way up to the largest corporations, collection problems are an ongoing, annoying, and costly fact of life. For some, the result is diminished cash flow and profit; for others, it can lead to bankruptcy.

Fortunately, collection problems can be significantly reduced. The recommended methods of communication about money, which I will describe below, not only produce a far better recovery of accounts receivable, they also, paradoxically, result in the likelihood of added business, thanks to the clearer understanding about payment. In other words, a business doesn't have to choose between what it has to do to get the money owed at the cost of irritating and losing the business.

So, how, exactly, do we achieve this "best of all possible worlds"? It's really quite simple. There is a two step process. The first part is the payment policy. The second part is how to communicate it to all potential debtors (customers, clients, patients, borrowers).

The Payment Policy Every business has a payment policy. It often is not stated fully or clearly. Further, customers sometimes have their own payment policy, which can be summarized as, "I'll pay you when I'm good and ready, and in an amount that doesn't inconvenience me too much, and if that bothers you, I can always take my business elsewhere".

What you, the credit grantor, have to do is think through exactly how you want to be paid, including any special situations such as change orders for contractors or the probability of several bills from a hospital, and put that in writing. So far, so good, but that's only part of the job. The tougher part is that you have to add the CONSEQUENCES for not complying with the policy. If there are no consequences for not paying as agreed, your debtor can feel free to pay when they're good and ready.

Examples of consequences include the following:

• Requiring payment upon receipt of the invoice (although you choose to give 30 days to pay).
• Charging interest or a rebilling fee for payments over, say, 30 days.
• Account will be sent to collection, which can affect debtor's credit standing.
• Account will be sued in Small Claims or a higher court, depending on the amount owed.

Communicating Your Policy

Once you have a payment policy in writing, you need to discuss it with every customer, present as well as future. At the end of this section, I'll discuss how to re-educate present customers to your new, and probably "tougher" (I prefer the phrase "clearer") payment policy, and what to do with customers you never see and can communicate with only over the phone.

There are three objectives in communicating your new, well-thought-out policy. You want your customer to:

• Understand the policy, including the consequences.
• Follow it (pay as agreed).
• Actually thank you for being so up front about an issue that is so important to all of us; namely, money.

To achieve these objectives, you use three levels of achieving feedback, as follows:

• First, ask if there are any questions. It's a good start, but many people don't like to ask questions or avoid doing so because they don't want to deal with what the answer might be.
• To make it easier for people to ask questions, say this, "Many of our customers had a question about one part or another of our payment policy. What part of it isn't completely clear for you?"
• Even if the answer to that question is, "I understand it all. I have no questions", you need to point out those aspects of your policy that have caused misunderstandings in the past, leading to slow or non-payment.

If you do business with customers that you never see, the process is the same, but you obviously do it over the phone.

It usually makes sense to have your payment agreement drawn up by an attorney with experience in business matters, and it is advisable to have the customer sign the payment agreement.

Changing Your Policy

If you've had an ineffective payment policy and you plan to improve it, the question is how to deal with current customers, most of which are, hopefully, already paying in full and on time. The purpose of clarifying your policy is to deal more effectively with the problem customers - current as well as future ones.

With your good customers, you say something like this when you present the new policy, "Customer, if all our customers were as reliable and trustworthy as you are about paying on time, we wouldn't have to spell out our payment policy so clearly, but, as you know, there's always a few bad apples in every barrel, and it's those folks we have to be really up front with about paying for our service, so that's why we felt we owed it to everyone to be totally clear about payment and what we have to do with the few people who play games about paying us. I hope that makes sense." Good customers like and understand the part about "good customers like you".

That usually clears the air. And, for your current problem customers, if they sign and agree to comply in the future, fine. If they give you a hard time, it's very useful to know that, and you can then better decide if you want to continue to do business with them, or maybe do business with them only upon payment in full up front.

Finally, many observers of what I've described complain that, even though it makes sense, it will take more time to go through all these steps, and they don't have enough time, as it is, to do all the things they have to do. The answer to that is simple - if you don't take the time to spell out how you want to be paid, PRIOR to doing business, you will spend it AFTER you provide your product or service, and you'll spend A LOT MORE time, and your bargaining position will be worse.

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Article Tags: changing policy, communication, debt collection, payment policy, referrals



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