Small business owners are constantly searching for strategies to boost their profitability. One approach to achieve this is collecting past-due invoices as soon as possible. However, it might be difficult for business owners without a lot of collections expertise.
Furthermore, most proprietors of small businesses lack a collections division, which makes it more challenging to monitor overdue invoices and swiftly contact clients who have not yet paid.
The article will discuss some best practices for collecting invoices to help small business owners.
1. Get a Contract
Although it’s tempting to dive right into business, you should have a legally binding contract before sealing a deal. It makes good business sense, too.
The services you agree to provide, and the terms under which you will receive payments need to be in a legally binding contract. Putting anything in writing, even if it’s only “I’ll do this” and “then you’ll do that,” is better than having nothing.
When drafting such a contract, it’s ideal that you work with a legal professional familiar with your business.
2. Let Clients Know You Mean It
You can’t survive without your clients, but if you routinely overlook payment delays, you’ll damage your reputation, lose credibility, and lose money. By doing so, you are offering your clients interest-free financing.
If that is the business you wish to be in, you should pursue it. But in all likelihood, this is not the case, so you’ll want to develop a procedure for keeping tabs on unpaid invoices and, if necessary, reminding clients of the payment terms and the contract they agreed to when doing business with you.
3. Identify the Issue
Your objective is to determine why a client is holding up your money and how you can get it back. Maybe your client has forgotten, hit a tough moment, or is overwhelmed by administrative duties.
When you’ve identified the source of the issue, you and the client can work out a solution that includes fair payment terms.
If a client is going through tough times, you may need to figure out how likely they will get back on their feet and how much money you can expect to get back. For instance, is their inability to pay due to factors beyond their control?
The “how” of getting paid on time will become apparent once you have established an open channel of contact with accounts receivable and better understand the “why.”
A payment delay can alert you to additional problems in your organization, such as unfinished project deliverables. It can also help you determine if the client is worth keeping if you uncover red flags.
4. Sooner Is Better Than Later
Anybody in the collections field will tell you that the earlier in the payment cycle you are active, the higher the likelihood that you will recoup some or all of your money.
Usually, things grow worse than expected because you wait a few weeks, get distracted by other things, feel dumb for not following up sooner, and then wait a few more weeks.
Put a stop to this vicious cycle before it begins. One way to increase the likelihood of successfully recovering a debt is to engage in systematic follow-up from the outset of the cycle.
5. Know Your Rights
You may be stumbling around in the dark about collecting invoices if you haven’t had any training in accounts receivable or debt collection.
The earlier you learn about your rights and possible recourse, the better off you will be. You’ll not only gain knowledge of what you can and cannot do, but you’ll also gain self-assurance in handling clients.
Did you know, for instance, that you can lawfully search for somebody’s social security number if they are avoiding your debt recovery endeavors?
6. Make a Deal To Settle For Less
Suppose a customer owes you $20,000 and is 120 days late on it. For the past four months, you’ve been attempting to collect a debt that seems hopeless. Always try to negotiate a reduced settlement amount with the client before writing off a debt.
Even though the late payment stresses you out, you can be sure that it stresses the customer out even more. They are probably losing sleep over it.
They may be eager to get $5,000 off their books if you approach them and say you’re prepared to take it. And because you had written this off as hopeless anyhow, that’s an extra $5,000 in your pocket.
7. Stay Calm
It’s only human to feel upset at a customer who has received your services but has been late in making payment.
However, you must take a deep breath and keep your cool. Anger will reduce the likelihood of successful debt collection. The customer will feel your anger, take it personally, and refuse to cooperate with you.
Your mood greatly affects how you deal with the client and how they deal with you. Treat every call like it’s the first call of a fantastic day. If you were angry on the last call, give yourself some time to calm down and then try again.
The client will react to the tone you set. Your optimistic attitude will rub off on the client and prompt a more cooperative response.
Although persistence is crucial in debt collection, there is a narrow line between following up and pestering:
- To harass clients would be to call them each morning for 60 days and yell at them.
- A persistent approach would involve calling customers every seven to ten days and providing them with several payment plans to help them get started paying down their debt.
8. Record Everything
Documentation is one of the most crucial things when trying to recover your money from clients. If the debt leads to a lawsuit, having records to refer to will be pretty helpful.
- Record the conversation and write notes whenever you speak with a customer over the phone.
- Verify and copy each letter you send through the mail.
- Keep track of your customer visits, whether to their office or home.
9. Get Everyone on Your Team On the Same Page
The collection process relies on input from all client-facing departments, particularly sales. Many firms do not include their sales staff in their collection process since they mistakenly believe that the obligation falls only on the finance team.
However, if you’re still having trouble receiving payments after a third reminder, the answer may lie with your sales team.
You might assume that the customer has bad financial management, but your sales team might know otherwise. It might be a pending complaint or an unforeseen issue with the product or service.
Collecting invoices is a tiring process. In certain situations, you may feel that you’re being too soft, and in others, you may worry that you’re being too tough.
The objective is to strike a balance between the two extremes so that customers take you seriously and pay you back when it’s time.
On occasion, you will have to write off bad debt, but if you stick to the guidelines mentioned above, you should see some improvement. We hope the article will help you gain much knowledge about collecting invoices.
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