Studies show that 80% of businesses fail within their first five years. Many of these businesses were profitable but had to shut down because of “poor cash flow management.” This occurs when sales are made but you don’t receive payment until some point in the future, if at all. Meanwhile, you have bills to pay and don’t have the cash to do so. Thus, the cash coming in is less than cash going out and the business runs out of money to operate.
One way to avoid a cash crunch is to make sure you collect your bills on time and in full. If not, you may be squeezed between your non-paying customers and your suppliers. What can you do to stop this?
From a business perspective, the Wall Street Journal Center for Entrepreneurs suggests some of the following measures:
Ask your potential customer questions: Interview your potential customers about their bill-paying habits. For example, ask how many suppliers they have and who processes the bills (your chances of being paid on time will decrease if a single clerk is processing hundreds of bills in a month). Ask for references and check credit reports. You may be able to avoid the non-payment of invoices if you never sell to troublesome customers in the first place.
Implement a bill collection policy: Ideally, new customers with no credit history should be put on cash on delivery or short payment terms (i.e. 14 days net). All customers should be alerted (preferably by phone) shortly before a bill is due. Studies show that over 65% of invoices are uncollectible 60 days after its due date. The sooner you collect, the better off you are.
Some large customers do not pay on time- plan accordingly: Some large companies pay their bills slower than their small and medium-sized counter-parts. Larger companies, with large bureaucracies, tend to process payments slowly. If you have a large company as a client, please take appropriate measures, such as obtaining large overdraft protection or lines of credit, to protect yourself against the consequences of slow payment.
Put everything in writing: The Wall Street Center for Entrepreneurs writes: “a written agreement to pay helps bring your invoice to the top of the customer's stack.” Written agreements help you avoid “he said, she said” arguments about payment terms and both parties understand their rights and obligations clearly. Please speak to a lawyer to ensure your agreement gets to the top of your customer’s stack.
If the payment is late, argue the terms not the amount: If you ask for less than the full amount owing, that is all you are going to get. The only point in negotiation should be the terms of payment.
From a legal perspective, how do you act on some of these suggestions? Here are some measures you and your lawyer can implement..
Drafting an Effective Contract - Terms and Conditions
Many of you often express your fear to me that a lengthy contract will “scare off customers.” An effective contract does not necessarily mean a 20 page contract! Sometimes, a one page invoice with the proper terms and conditions can be as effective as a lengthy contract. Each business is different, so please consult a lawyer about your contractual needs..
As a general guide, you may want to consider addressing the following issues in your contract:
Do you have the right to suspend service in the event of non-payment?
Do you retain title to goods until final payment is made?
Can you charge interest on late payments?
Drafting an Effective Contract - Payment and Deposit Policies
Payment and deposit policies vary from industry to industry. If you operate in an industry that works on deposits, please consider the following issues:
Is the deposit refundable or non-refundable? Surprisingly, many people forget to state this in writing.
How much should the deposit be? Generally, a deposit should cover the costs to attract a customer, over-head and a “cushion” representing your profit margin.
Will goods or services be released only upon full payment?
In the event of non-payment, communicate promptly and keep track of your correspondence
The collections process can be timely and costly for your business. Lawsuits, in general, should be avoided because the costs involved may not be cost-effective relative to the amount owing to you. However, you should at all times keep track of every communication you have with a customer with respect to non-payment. This will accomplish several goals: (i) the parties know where they stand at all times; (ii) keeping track of communication shows that you are serious about collecting; and (iii) in the event of a lawsuit, you have strengthened your case by having written evidence on hand.
If nothing else works, be prepared to sue
As a last resort, do not be afraid to sue or retain a collection agency. Len Sklar, who has been published on effective bill collecting, states that approximately 30% of all debtors settle their bills before they go to court. This number may be on the low side since many lawyers believe that over 90% of legal disputes are settled before a judge hears it.
Collection agencies generally charge by a percentage of monies collected. In Ontario, you may sue to recover debts under $10,000 in Small Claims Court. Lawsuits to recover debt over $10,000 are heard by the Superior Court of Justice. Please consult a lawyer to determine the proper options for you.
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