Getting paid on time: Tips for managing receivables

REGION – If you've been in business for any length of time, you've probably had a few clients who have impacted your bottom line-but not in the good way. Customers who are slow to pay, or even don't pay, are a risk if you offer payment terms. Not only do they put a dent in your receivables, they can put a strain on those business relationships.

So, what do you do about clients who are slow to "show you the money?"

"It's such a ripple effect," when clients don't pay, said Holly Finch, owner of Frost Hill Financial Services in Elk Rapids.

Finch, an accountant who specializes in QuickBooks and offers her financial outsourcing services to small businesses in the area, said she does call on a client's behalf when payment is late. She said establishing a payment schedule is much easier than working to get paid later.

"It's a lot harder to do collections than to set expectations up front," she noted.

Finch does have a couple of clients currently who require either credit card payment upfront or cash on delivery for shipments. While it is a more cost-effective way to do business, potential customers could decide to go to a different source that offers payment terms, she added.

"You have to think of yourself as a bank if you're offering payment terms," said Chris Wendel, regional director of the Michigan Small Business & Technology Development Center. "And you have to manage it like one, too."

That means staying on top of your receivables.

"Most companies (small businesses) don't notice when delinquent accounts are slipping," Wendel said, even stretching to the 120-day mark.

"Any business can make the mistake of letting it go too long," added Chuck Havill, owner of The Credit Bureau of Traverse City. "The longer it goes, the less the probability of getting paid."

Finch said that for many small business owners the responsibility of managing the financial arm of the business can be a big challenge, and she said outsourcing allows owners to focus on the work itself. If a business is going to offer terms, she recommends setting up a contract with clients that establishes payment terms, as well as performing credit checks on potential customers.

What steps can business owners take to reduce delinquent accounts? According to Wendel, it's about having the right people-with good customer service skills-working on the account.

"Pay attention to it," Wendel said. "Make it a priority."

Added Finch, "One of the best things a company can do is make a phone call. It solves 90 percent of payment problems."

Nationally, customers are trending toward more liberal payment habits-45 to 60 days-than in the past, Wendel said. This could, conceivably, move more businesses toward tightening their credit terms or not extending credit at all.

He added that whether owners require payment upfront or offer payment terms depends on the type of business it is.

"What's your competition doing?" Wendel asked. If the business does offer payment terms, it's important to stick by them so cash flow is managed wisely.

If it comes to the point of severing relationships with customers, Wendel said those who are chronically late are the ones to look at first. It's important to document the time the company is expending on collecting from a customer.

"Make sure you're not spending too many resources," on one client, he said.

Other issues in determining whether to sever a relationship: customer longevity and sales volume, Wendel said. Generally, you don't want to be reliant on one customer for more than 5 to 10 percent of your business, he said, though that can be hard in certain industries, such as manufacturing. But if a delinquent business is communicating with you openly and honestly about payment difficulties, then it may be worthwhile to try to sustain a relationship.

Owners who are struggling with client payment issues can seek out counseling services from the Small Business & Technology Development Center, the local chapter of SCORE, or from an accounting professional. BN