3 Vital Steps for Collecting Payments From Clients

3 Vital Steps for Collecting Payments From Clients

All across America, accounting firms diligently protect their clients’ best financial interests through consultation, employment tax preparation, annual tax returns, balance sheet and P&L review, and company audits. Frequently, the issue of “accounts receivable” might also be discussed, with recommendations made to clients to increase collection efforts to improve cash flow and profitability.

In today’s economic environment, companies engage in the proverbial robbing Peter to pay Paul. Ultimately, a domino effect ensues where company C can’t pay company B because B hasn’t been paid by company A. You want to be Paul and you want to get your money, but it just doesn’t happen magically!

Likewise, many accounting firms may fall victim to the A/R blues. Clients may not promptly pay their accounting invoices, driving company cash flow into the red. It is time that all businesses, including accounting firms, start accounting for your receivables! I have worked in, managed and now own a third-party collection enterprise for more than 35 years. I started in the industry at age 12 when my parents opened a collection agency in northeast Pennsylvania. Over the past 20 years, I have advised and consulted businesses on best practices in the credit and collection industry, and would like to share some critical insight into the collection function.

There are three vital steps to protecting the financial integrity of any business. First you must develop a Credit Policy. Second, you must strategize a Collection Policy. Finally, you must establish a Culture of Paying within your organization. Working in unison, these three elements will enable most firms to make better up-front decisions on client billing, promptly dealing with late payers and conveying the firm’s stance that it expects to be paid for quality services rendered on a timely basis.

#1: State Your Credit Policy in the Engagement Letter

No matter the size of your firm, it is important to be assured that you will be paid promptly for services rendered. The best time to convey your office’s expectations for payment is at the very start of the client relationship and then underscored annually. Each year, my firm provides me with a new “Letter of Engagement” that clearly outlines the services it will provide to my corporation over the next 12 months.

This is the perfect opportunity to express your payment terms. Outline when your invoices will be presented, when you expect the invoices to be paid and what you plan to do if a client becomes delinquent. When signing up a new client, ask who did their accounting work in the past. Are they jumping from firm to firm due to non-payment? After you review their company’s financials, you are uniquely positioned to determine the risk level of the firm based on the P&L and perceived ability to pay.

#2: Develop a Clear Collection Policy

I have discovered that most businesses, today, have some fairly clear ideas about extending credit, how long they will wait for payment and how much they will allow customers to accrue. They may even have these policies in writing and signed by the customer. Often, unfortunately, actually collecting the debt stops there.

It is imperative to develop a very clear, thoughtfully orchestrated collection policy to guide billing staff through varying levels of delinquency. A good collection policy includes the following:

  • Is a grace period offered and for how long?
  • Will a finance charge be assessed and how much?
  • What actions (telephone or in writing) will be taken at each level of delinquency?
  • What collection reminder/notice will be sent according to aging?
  • At what level of delinquency do you cease your services?
  • When do you write off the account as bad debt?
  • When do you place accounts with outside collection firms?

If an effective collection policy is put into action, then there will never be an occasion to ask, “What do I do next on this account?” The next steps are clear, concise and previously strategized by management. There are, of course, exceptions to every rule, so there should be a clear avenue to review unusual cases for timely mitigation.

#3: Establish a Culture of Paying – The Squeaky Wheel

Creditors who get paid first and in a timely manner are those who have clearly built and conveyed a culture of paying. A culture of paying refers to carefully and clearly deciding who gets credit, meticulously following collection polices that are in place, and finally ASKING FOR THE MONEY!

There is a slogan in collections that says, “The squeaky wheel gets the oil.” This is the very foundation of a successful recovery strategy. The more often you ask to get paid, the more likely you will get paid.

Several years ago I was presenting a collection seminar to a large group. Before my program started, an attendee asked me what I thought was the secret to collections. If she had to leave the program before it started due to an emergency, she wanted to know the number one, most vital aspect to keep in mind for the future. The answer to her question is clear: Follow up! Follow up! Follow up!

One of the mistakes accounting firms make in their billing and collections is the failure to ask for the money, whether by phone or mail. This is often due to the lack of time and resources within the accounting office. If the ABC Company promises to pay $500 on its invoice tomorrow and the payment isn’t in your office within three days, you must contact them immediately. A reminder call made three weeks later will ultimately teach the customer that your firm is not serious about collecting. You’ll be at the bottom of the payment priority list.

You may find much-needed assistance available to your office by today’s progressive third-party debt collection firms. At one time, collection agencies were depositories for older, bad debt. Today, they are partners in every stage of the recovery process. A solid firm can send letters on your behalf, make soft collection calls in your name, engage in a variety of “pre-collect” services, work your accounts after write off, and even file lawsuits on your behalf. Use of this type of resource should absolutely be part of any good credit and collection plan.

If your firm is stuck in a quagmire of unpaid invoices and maintains an A/R report that would make you cringe if you saw the same figures on a client’s balance sheet, all is not lost. The time is NOW to devote energy on the creation and implementation of practical steps to protect your financial resources. Change is difficult and time consuming, but necessary.

It has been said about change that, “You can survive the old way and you can survive the new way. It is the transition that will kill you!” With regard to effective collections, the transition may take time, but the old way of doing business will kill your financial lifeline swiftly. Act now and start the process of accounting for your receivables!