Debt collections on outstanding invoices in arrears can be a problem for any small business owner, especially a small service business. When work is done with payment due Next 30 days, the issue of accounts receivable collections can be even more severe.
State Terms of Service Foremost and Clearly to Avoid Debt Collection Problems
Small actions before starting a job can make a huge difference in account receivable collection. Many times, the problem does not occur when trying to collect the debt. The problem took place during the initial conference with the new client. Some owners are reluctant to lay out terms of service. Terms of service should be fully understood before work begins.
Verify New Clients to Avoid Debt Collection Problems
Depending on the type of service provided, there is usually an amount of time to check a new customer, which will eliminate a lot of debt collection headaches. A new client can be verified relatively easily and usually in a short period.
1) Better Business Bureau
2) Check credit credentials (trade associations)
3) Check any online credentials
4) Credit verification services (worth the cost if no other verification means are available)
5) Ask for and verify references
6) Check with other business associates in your industry to see if they know this client
If the prospective customer’s business dealings show him/her to be unsatisfactory, then a denial of services is appropriate and necessary. A “deadbeat” is a habitual non-payer. They usually do not change.
Send Monthly Statements to Avoid Debt Collection Problems
Sending a monthly statement is sometimes considered an “outdated” practice. When accounts receivables run over a 30 day period for payment, reports are essential for accounts receivable collections. If an invoice is paid on time, there is some profit. If an invoice is 30 days late, there is no profit and possibly a loss. By the time an invoice is 90 days old, labor and materials are not even covered.
Be Persistent in Collecting Invoices
Check on overdue invoices promptly. Do not wait until they are 30 or 60 days past due. Follow up within two weeks. Keep sending monthly statements, requesting payment. Make phone calls where possible. Be aware that a “friendly” offer is more appreciated than a harsh one and will be more successful in invoice collections. Persistence is the key. The client should learn that you will not go away. It is true that “The squeaky wheel gets the grease.”
In a small service business, labor and taxes can run from 70 to 80 percent of the gross income. It is important to keep accounts receivables revolving to ensure that payroll can be met and bills paid. Be diligent in:
1) Make sure the client understands the terms of service
2) Checking any credit references
3) Staying on top of outstanding invoices (be persistent)
It is usually impossible to eliminate all bad debts. Collection agencies are expensive, and filing liens are time-consuming. If the mentioned practices are followed diligently, then bad debts will be at a minimum. Anything that can be done to limit bad debts before they happen can and should be done.