Two brothers woke up before dawn, went to the pineapple vendor downtown, picked up 50 pineapples for $50 and spent the day selling the pineapples for $1 each. They sold out the first day. The entrepreneurs counted up their receipts and realized they made no profit. The second day they purchased 100 pineapples for $1 each. They loaded the truck, sold each for $1 and at the end of the day discovered no profit. Dismayed, the brothers pondered why there was no profit to be made in the pineapple-selling business and went to bed frustrated. “I figured it out,” one brother suddenly yelled to the other. “I know why we are not making any money. We need to get a bigger truck!”
No matter what business you are in, if you cannot properly manage the business, your business will fail. The widget itself is secondary to running the business. A commonly overlooked factor that contributes to the downfall of many businesses is receivables.
What can a business do to increase its chances of collecting from a customer? Know the customer. Request a current vendor list from new customers. Check credit reports. Another technique worth considering is the personal guarantee. As time passes so does the chance of collecting receivables. The odds of collecting on an invoice decrease once the invoice becomes 30 days past-due. The likelihood of collections decreases to 20 percent after one year and less than 10 percent after two years.
Remind your clients that you expect to get paid based on the terms already agreed upon. A simple reminder is sometimes enough to get them to whip out the checkbook. Structure timely billing practices and enforce them. One private-practitioner lawyer never did his billing on time, yet asked what he needed to do to get his receivables down. Why should clients have any sense of urgency to pay a business or individual who gives the impression that thereās no urge to get paid? After 60 days of consistent billing with a part-time bookkeeper he hired, his 90-plus-day receivables dropped by almost 70 percent. When hiring an outside company to assist with your collections, be clear on their practices and how they are compensated.
Balance a firm, aggressive position on your receivables with the need for good relations and business friendships. Under certain circumstances, consider reducing an invoice if you know such a reduction will result in a continued and profitable relationship with the client. However, remember that not all clients are good clients. Clients refusing to pay are rarely good clients.
When collecting from a consumer, a business has to comply with the Fair Debt Collection Practices Act. When collecting from a business, other laws may apply, such as the Uniform Commercial Code.
Litigation should be a last resort to collecting past-due money. Weigh the cost of litigation against the amount of money due. In most states, a corporation, as plaintiff, must be represented by an attorney. Hiring an attorney simply adds to the collection cost. Litigation must make sense. We have all heard the saying, “It is the principle of the thing.” Principle does not pay the bills, and one cannot deposit principle in the bank.
If it makes sense, litigate. If it does not, do not be afraid to simply write off a bad debt on occasion. Alert your accountant. Writing off your receivable may be beneficial on your year-end tax return.