Checklist: Collecting Cash From Customers
Managing cash flow is vital for any small business - sometimes marking the difference between success and failure. It is often a difficult balancing act to keep expenses in line with money received by customers. Collecting outstanding amounts due from customers is never a pleasant task, but it is an essential one. If overdue amounts get out of hand, they can cause serious cash-flow problems for your business.
Customers who owe your business money are referred to as 'debtors' and an account receivable is created for each of them. Managing debtors can be a full-time task and for many small businesses the process needs to be managed on a daily basis. It is a good idea to send out reminders in advance of the payment due date. Customers may overlook an invoice, or they may have cash-flow problems of their own. Because cash is such a vital asset to all businesses, you need to do everything possible to make sure your customers pay on time.
This checklist will help you establish a cash collection and credit policy that will enable you to manage your receivables as efficiently as possible.
Establish Methods of Payment and Credit Terms to Offer Customers
There are a number of possible payment options, including:
- Cash on delivery - payment due when goods or services are received
- Partial or full payment prior to delivery of goods or services (allow time for cheques to clear, or other transfers to take place)
- Payment with order - e.g. cash payment in a retail store, prepayment in the form of a cheque, cashier's cheque, money order, electronic funds transfer, or credit card payment
- Payment on account - e.g. extending credit terms of net 30 days
You might decide to offer different payment options to different categories of customer - extending credit terms to commercial customers but expecting members of the public to pay on the spot for example
- Payment options finalized
Establish a Credit Rating Policy
It may be appropriate to run credit checks on potential customers. You can do this for a small fee through a credit agency. Checking a customer's credit rating will mitigate the risk of not getting paid. Offering credit terms is always risky, especially for a small business. You may rely on your customers paying on time in order to pay your own suppliers. You may want to consider asking for personal guarantees from your customers' company officers.
- Credit rating policy in place
Determine Standard Payment Terms
Your business payment terms should clearly define how and when you will supply products or services and the expected timing of customer payments. You may want to include order quantity discounts or early payment discounts. Include these terms in all sales contracts.
- Terms and conditions drawn up
Establish Your Credit Policy
Once you have determined your preferred payment and credit terms, and defined your payment terms, you can draw up your credit policy. You may want to include the following:
- Payment terms agreed to in writing with customers before supplying goods or services
- Credit limit available to customers
- Timing for invoice send out. Print payment terms on the invoice and assign one person the responsibility of preparing and sending out invoices
- Procedures for following up unpaid bills
- Salesperson commission policies. Will salespeople will be involved with credit and collection activities? Will they be compensated on uncollectible sales?
- Your policy on applying interest to late payments which may be capped by law
- Procedures for taking action against customers who default on payment
Devise Procedures for Managing Overdue Accounts
You should devise and set up a systematic, focused procedure to manage overdue accounts. Your procedures could include:
- Instructions to staff to follow up outstanding amounts immediately
- A process to remind customers that payment is overdue
- Instructions to use a personal touch. Regular contact by telephone or in person to request payment is more likely to achieve results
- A set period of time in which to try to collect overdue payments before taking further action
- Instructions to identify the reason for the late or non-payment before taking further action
- Procedures if a payment is still not forthcoming. Options include applying interest to late payments, agreeing to a payment schedule, or taking legal action. If customers are genuinely struggling to pay, you may be better off agreeing to a payment schedule so that they can pay over a period of time
- System to manage overdue accounts devised
Brief Employees about Credit Policy and Procedures
Ensure appropriate employees are fully briefed on your credit policy. Credit procedures should also be managed by one person on a daily basis: checking payments received against amounts outstanding, and taking appropriate action on overdue payments. The efficient management of receivables also relies on keeping all customer records up to date.
Review Customer Service Policy
It is important to establish a good relationship with your customers and therefore your customer service department should operate as efficiently as possible. Keeping in touch with your customers on a regular basis helps you to understand any difficulties that may affect their ability to pay on time, allowing you to suggest alternative methods of payment, such as installments, if necessary.
- Customer service policy reviewed
Consider Accounting Software
If your business works with a large number of debtors, you need to consider an automated accounting solution that automatically generates invoices and helps you to keep track of all outstanding debts.
- Accounting software considered
Document Returns Policy
Customers who are experiencing financial difficulties might decide to return the goods they order. Make sure that you have a clear returns policy in place and notify your customers in advance of any restocking fees or other charges that might apply.
- Returns policy documented
Consider the Services of a Debt Collection Agency or Factoring Service
You might decide that outsourcing debt-collection would be suitable for your business. A collection agency will take over the task of collecting from your customers and will pay you a percentage once they collect on your accounts. A factoring service, on the other hand, will pay you a percentage of your outstanding receivables balance and will then take over collections from your customers. These are short-term solutions that can help you catch up on a working capital shortage, but you need to clearly understand the percentage that you sacrifice by turning over your accounts.
- Review the pros and cons of debt collection agencies
Use of Small Claims Court to Recover Unpaid Bills
Taking your debtors to a small claims court sends out the message that you take unpaid bills seriously, even when the amounts in question are small.
- Small claims court policy
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