How to Collect From Clients: Walk the Walk, Talk the Talk

How to Collect From Clients: Walk the Walk, Talk the Talk

on Aug 29, 2001 by William H. Mills (Former President and COO, Software Business Technologies)

Very few entrepreneurs begin their business ventures with the goal of becoming collection agents. Unfortunately, some of us have found ourselves in this unwelcome and unsavory role as a matter of business survival. Developing a consistently successful accounts-receivables program does not have to be a daunting process. By following some straightforward, time-tested guidelines, you can implement a "win-win" strategy that gets your invoices paid on time and allows you to maintain positive, long-term business relationships with clients. What follows is a discussion of how to walk the walk, and talk the talk, of collection.

Money Talks, and So Must You

Why do some business owners seldom, if ever, voice complaints about past-due balances, while others spend significant time on this problem? Much of the answer begins long before an invoice is sent. Indeed, one of the most valuable changes you can make in your accounts-receivable process is to define payment expectations with your clients in advance of services performed. You can also enter into a formal agreement that includes a sum to be paid up front, and then verbally review what you will do for the clients. Here's how:

• Establish Financial Boundaries. Discuss money during your first meeting with a client. Explain in a clear and concise manner exactly what you will do for the client, while specifically stating your compensation terms . Discuss in detail, for example, the cost of a visit to the client's site or two rounds of revisions on a project. Your clear communication during this meeting is essential, because it establishes important financial boundaries with the client.


• Formalize an Agreement. The boundaries discussed at the initial meeting should then be documented in writing. In an obligating agreement, you should list the specific services to be performed or work to be delivered, and the estimated cost of the services or work. This agreement should explicitly state that your client owes you money for work performed or services rendered. The agreement should also specify the terms of payment, including the payment you expect in advance of services.


• Request Money in Advance. If it is the accepted practice within the industry, business owners should request a portion of their money in advance. In its professional-services business, SBT requires all clients, large and small, to pay a retainer that lasts across the life the job. Using the terminology of the industry is important, such as "deposit on hardgoods" or "retainer on services." This allows the client to understand you are asking for something others will ask for as well.

In one case, we at SBT asked an international freight company with worldwide offices for a down payment of one third. The freight company balked, but we insisted. Even if we came down to one percent from our original request, we would be able to say to other clients that we required this internationally known corporation to pay a portion in advance. Remember, you can acquiesce if the client protests--the freight company understood our position. But if you allow no up-front payment, you will have a much harder time later with other clients, and your cash flow is impacted significantly.

• Review Verbally. Take the time to review the agreement with your client before signing. This will enable you to reinforce the financial obligation that the agreement specifies. You can also use this verbal review time to inform your client about the value of your work. The talk might go something like this: "By adding these modifications to your system, you'll be able to process incoming orders in approximately half the time it's now taking." Simply stated, you are telling the client exactly what you are providing for a specific dollar amount, and therefore defining the client's expectations. There should be no question at the end of your meeting about what is being delivered, when to expect it, and how much it will cost.

Repeat After Me: "I Will Not Make Collection Calls"

Having personally defined the agenda for payment with your client, your next step in the accounts-receivables plan involves separating yourself from the collection process. Your business role now becomes fostering a long-term relationship with your client. This can be a tall order if you are the person picking up the phone to demand payment. Walking this walk involves two steps:

• Designate an Agent. It is imperative that the task of reminding clients to pay their bills, as well as more advanced collection activities, be undertaken by someone elsein your office, such as an office manager or administrative assistant. You might also consider hiring a third party to handle the job.


• Distance Yourself. When you have designated an individual to serve as your accounts-receivables manager, you can distance yourself and your business role from the collection function. Should a client call you to complain about a collection call, you can respond with a comment such as, "I'm glad you contacted me. I'll talk to my accounting department about this. I'm sure we can get it straightened out." This necessary separation allows you to maintain a distinctly different image in the mind of the client.

In your goal of preserving the valuable business relationship you have built up with your client, while at the same time holding the client to a contractual obligation, you are again establishing a boundary. This time, the boundary is more illusory than the written contract that defined your terms. But it is a boundary nonetheless: You are training your clients to view your "accounting department," or accounts-receivables manager, as an autonomous arm of your business. You are also allowing yourself to concentrate all of your energy on building your business.

Stay on Top of Your Invoicing Game

This brings us to your internal accounting procedures, and how they affect your accounts-receivables plan. The rule here is simple: keep your side of the street clean. Here's how:

• Set Billing Standards. Do not expect your client to pay from an incorrect invoice, or to pay the invoice on time if it is sent out late. Hold yourself to an invoicing standard calling for no errors and consistently punctual delivery, allowing ample time for your clients to meet your agreed-upon payment terms.


• Set Accounting Standards. What is the best way to ensure accurate and timely invoicing? Consider the method you now use for billing your clients. The off-the-shelf accounting package you probably used to start your business was fine, but as your business expands, so does your need for an automated accounting system. In anticipating growth and change in your business, look for an accounting system that provides features such as automatic updating of customer and inventory balances and flexibility for modifications as your business evolves.

You also need a package that recognizes the year 2000. Many programs are now configured to store only the final two digits of the year and will recognize the year 2000 as year 1900. You also need a package that enables computers to recognize that the year 2000 rather than 1900 will follow 1999, as many computer programs are now configured to store only the final two digits.

Solve Your Accounts-Receivables Problems Today

Having involved yourself in setting the payment agenda, distanced yourself from the billing process, and put your internal systems in order, the final step is collecting from slow-paying or non-paying clients. This involves an especially delicate walk and an artfully nuanced talk. Consider these steps:

• Use Late-Payment Fees. While it is almost impossible to collect late-payment fees in a commercial business relationship, you might use them as a tool that brings a collection problem to light. If you do, be consistent about when you add them. When negotiating for payment, you can then say, "If you overnight your payment to us, we will remove all or part of the finance charges" that will occur after 60 days. Do not book these fees as revenue, and don't expect them to be paid. Forcing this issue sends a client to your competitor.


• Bring Payment Issues to a Head. For really stubborn payers, it may be necessary to confront the problem directly. The best time to do this is at the most critical stage of the client's project. In the past, we have often asked clients to put themselves in our shoes. We have a payroll, other clients are paying as agreed, and we must keep the business running. We also make it clear that a delay in paying us is forcing us to stop work on the project so that our business can survive. We explain that if all clients were like this, we would be out of business. This sends a very clear message.


• Consider Arbitration. When it comes to legal action, only the lawyers make out in most cases. Therefore, we prefer to call for arbitration when an agreement or contract is disputed. This is less costly for both parties, and allows issues to be resolved faster. Always warn the client that he is forcing you "to bring in a third organization or person" to assist in resolving the payment issue.


• Stay Calm, Be Fair. Business people respect other business people who are fair, so treat clients as you would expect to be treated. Stay calm at all times, repeat options verbally and in writing, and consider compromise. I have told many clients, "Pay us now, or pay us later. We will write a credit for this issue, but it will cause us to consider our pricing much more carefully." Most clients who want to do business with you would rather keep you happy--and paid.

There's no time like the present to implement a new approach to getting paid on time. The incentives are obvious, and the necessary start-up time is minimal. The plan outlined above is remarkably simple, but requires consistency and follow-through on your part. You will be amazed at how quickly you see positive results.