Avoiding Bad Debts

Bad Debts are invoices or money owed to you that customers wouldn’t pay, and you’ve given up on trying to collect. They will become a write-off and essentially mean somebody received your services or products for free. We don’t like bad debts, so let’s discuss how to avoid bad debts and keep (most of) your accounts receivable (A/R) current.

Avoiding Terms: Payment Terms are when you allow a customer to pay you later or pay you over time. While avoiding terms and receiving payment at the point of sale is the best way to avoid having to collect later, this may not always be possible. Receiving payment before or during the sale is usually used for businesses providing one-time services such as mechanics, restaurants, residential services, retail stores, or direct sales to consumers. Other businesses may be unable to operate this way due to their industry norms. This includes many business-to-business transactions and services that do not have a fixed up-front price. Business types may include ongoing legal or professional services, wholesale and distribution, construction, and recurring monthly services or subscriptions. As a vendor, you may also choose to offer terms to expand your customer base and generate more sales.

Make A Plan: Go ahead and set up a realistic collection plan when you begin offering terms, but understand that this may change over time depending on your business and customers. The plan I help clients implement involves the following:

  • Decide how many days you want to allow customers to pay. Net 15 and Net 30 are the most common (they essentially mean that if you receive payment in that number of days, no other fees or discounts will be added).
  • When sending invoices, always send to the person who approves and the person who pays. I will address the owner or manager in the email, but add the accounts payable person or department as a CC.
  • Decide how many days to wait on a payment before sending a reminder (I prefer 5 days past the due date because some customers habitually wait until the due date to mail payment).
  • Always forward or reply to the previous email thread about the invoice. This provides a record of the entire conversation and all your attempts to collect.
  • Make the reminder friendly, but firm. Let the customer know that the payment is past due and request an exact payment amount within a specific time frame. [Hi Stephen, I’m just checking back on this March invoice which now shows as past due. Please send this payment of $225 by week’s end to bring your account back current.] Be sure to attach the invoice or statement so that the customer has everything needed to review, approve, and process the charge.
  • Set a calendar reminder to check for the payment 5 days after when you requested the payment be sent by.
  • If not received by the 5-day reminder, send another note. Instead of the email having a Re: or Fwd: prefix, I replace it with ‘2nd Request:’ The note will be a little different this time. [Hi Stephen, We did not receive your payment of $225 as requested. In order to avoid additional late fees, please respond to this email and confirm you are sending payment this week.] At this point, you should consider adding additional CCs such as higher decision makers (if any) from either of your companies.
  • If not received the following week, add a late fee and resend. I use 18% annual with a $25 or $35 minimum. 18% for one month would be $225 x .015 (.18÷12months) = $3.38 so in this case, we would use the $25 minimum per month.

Be Creative: If this is for an ongoing or recurring service, you can consider stopping the service or work if there still isn’t a payment after you add a late charge. Just be sure to let the customer know first so that they have the opportunity to resolve before the stoppage.

Some other options are to accept payment by credit card or allow the customer to make weekly or bi-weekly payments until caught up. You could even barter for one of the customer’s services instead of collecting the cash payment.

Sometimes your customers will not communicate by email and need USPS mailed invoices. In that situation, I follow a similar pattern, but use hand written notes on the invoice and varying size envelopes. By the time I get to adding a fee, I also begin sending all correspondence certified mail and making phone calls a few days after sending.

About Late Penalties: I’d rather have the on-time payment than the late fee. Collections takes up time and can impact the relationship with your customer. The goal should be to collect payment without having to add other punitive charges. Once you add the late fee, customers will often omit the late fee (I know I do so for clients). If this happens, (assuming they have continued billing) I continue to show the late fee on their balance and statement. Sometimes they pay and sometimes not. If a customer pays on time for three billing cycles, my rule is to quietly drop the late charge. Again, Id rather have the on-time payments; spending time on a $25 fee after they paid their bill is more contentious that I prefer.

Be Successful: I developed my collections system with a client whose 90-day past due A/R equaled an entire month of sales, creating many cash flow issues. Of that balance, 85% was collected; the other 15% was either negotiated down or written off completely. While working on the past due amounts (which took about 6 months to work through), it was important to manage all new receivables and stop the cycle. In the end, they were able to implement a system where most invoices are collected within 30 days, and it is extremely rare for anything to get past 60 days old.

I wish you luck with your receivables and hope you’ll be able to utilize some or all of these strategies to keep all your customers current.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s