Have Your Collections Policy Ready

Nina L. Kaufman, Esq.

Nina L. Kaufman, Esq.

Nina L. Kaufman, Esq., owner of Ask The Business Lawyer, is an award-winning business attorney, speaker, and Entrepreneur Magazine online contributor. She saves consulting and professional services companies time, money, and aggravation by serving as their outsourced legal counsel.

Posted on May 13, 2015 in Business Transactions, Disputes

If you don’t want to get stiffed, know ahead of time how you plan to collect on overdue receivables.

In any economy, there’s only one thing worse than not having work to do. That’s spending the time and effort to do the work . . . and still not getting paid. Frankly, I’d rather be sitting around twiddling my thumbs or reading trashy murder mysteries than doing work and getting stiffed. (How do I know? Been there, done that, got the T-shirt. )

And here’s an unpleasant thought: At some point in the course of your business, you will get stiffed. Probably more than once. I’ve been practicing for 15 years, and I can’t name a single client who never had a problem with receivables.

As my colleague, Dawn Fotopulos, serial entrepreneur and principal of DF Consulting Inc. is fond of saying, “Cash is to your business as blood is to your body.” So how can you make sure the cash/blood keeps flowing?

Have a plan.

Don’t sit around surprised like a deer in the headlights when you’re faced with a past-due receivable. Expect them to arise. Know in advance how you’re going to handle them. In fact, if you can work out your plan even before you take on that first client, so much the better. Your plan then becomes part of your contract with that client.

Some crucial elements of your plan:

  • Make an invoice schedule. How regularly will you send out bills? How soon after you’ve sent/completed your product or service? I used to work for a law firm that would send out invoices two, three, even six months after it rendered the service. The correlation is direct: The later the bill is sent, the more likely the client is to question it. The longer you wait, the less likely you’re “top of mind.” Set aside particular times each month and stick to them.
  • Follow up. How soon after you’ve sent that invoice (and it hasn’t been paid) will you follow up with the client? In what way will you follow up? By phone? E-mail? Snail mail? Brute squad? (OK, only kidding about that last one.) Coaxing money out of a tight fist takes a delicate but persistent touch. Fotopulos recounts how she paid personal visits to clients when their receivables exceeded a certain time frame. In one case, the client–who had owed her money for months–was so upset by her visit that he had the audacity to throw the money at her. It took incredible fortitude on her part to endure the discomfort of a face-to-face confrontation. But in the end, she got paid.
  • Run the numbers. Oh, no, yet another thing you have to monitor in your business? Yup. How will you know which clients owe you money (and for how long) unless you run the numbers? And how else will you know which follow-up method to use with each client? Run your “accounts receivable aging reports” on a regular basis. Without them, it’s too easy to let outstanding payables slip . . . with the net effect that you’ve done the work and haven’t gotten paid.

The key to an effective collections policy is consistency. Like the adage, “The squeaky wheel gets the grease,” your collections policy can provide you with the structure–and, perhaps, the script–you need to demand your due.

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