SOP Friday: Collection Policies

Let's be clear: This post is about Collection Policies. For some background and advice about billing and invoicing, see Invoice Review and Processing, Billing Procedures and Policies, Cash Flow: Getting Paid in Advance.

So the setup is this: You've either sold hardware/software or services and your client owes you money . . . but doesn't pay in a timely manner.

I cannot continue without mentioning an absolute truth of life: You should be pre-paid for as much as possible. For most small I.T. consultants, that means you should be pre-paid . . .

- 100% for hardware
- 100% for software
- 100% for managed services
- At least 50% for projects. 100% of projects under $2,500; 50% of projects under $5,000; 25% of all other projects.

You can either have the client just pay you, or you can have them finance it through a leasing company. If they finance through a leasing company, you will normall get 100% of all products up front and 100% of labor within three days of the client signing off on completion of a project.

Notice that the leasing company gets a percentage of the total. They get paid for lending money and taking payments. That's a very strong clue that this behavior is worth paying extra for. In other words, it has value. So don't YOU give it to clients for free!

Anyway . . .

A client owes you money and they don't pay in a timely manner.

The key variables to consider are:

1) The amount in question
2) The paying habits of the client
3) The age of the debt
4) The contracts or ongoing agreements with the client

For example, we have a very simple rule about collections. On Monday, we review receivables. If any client has an outstanding balance greater than $500 that is past due, we assess a late fee of $25 and send them a note requesting payment. We also tell them that their account is "suspended." That means that we'll respond to emergencies, but we will not put updates to anti-virus, we will not monitor backups, etc. In other words, we won't provide them service until their bill is up to date.

Many clients have "learned" that Net 30 really means 30 days, but not really late until 30 days later, so they always pay on day 59. Whoever is teaching this stuff will burn in hell forever.

You don't have to put up with it. First, set your terms to be Net 20. Then charge late fees on day 21.

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As a general rule, our first contact is something like this:

Dear Client:

Just a friendly reminder that the following invoice is overdue:

Inv. No. Inv. Date Due Date Inv. Amount Balance
12345 02/03/2013 02/23/2013 $1,050.00 $1,050.00

If you have any questions about the amount you owe, please give us a call and we'll be happy to discuss it. If you've already sent your payment, please disregard this reminder.

We appreciate your continuing business, and we look forward to hearing from you shortly.

Sincerely,
Us

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If you're not sure how to start a collection letter, go into QuickBooks and look at the same letters they've put together. QuickBooks has "friendly" and "harsh" letters. And of course you can Google collection letters to find more.

The important question is, what are your policies?

When a client invoices goes "late" what do you do? What's the first thing? What's the second thing? The easiest way to build this policy is with a timeline. For us this starts every Monday when we review past due invoices. If anyone owes more than $500, and it's past due, the office manager sends an email similar to the email above.

And she assesses a late fee.

On the first business day of the month, we assess a finance charge to all accounts that are overdue. QuickBooks has an automated feature for this.

If any accounts are 30 days past due, we cut off service, as described above.

In the very unusual event that someone is 60 days past due, we write them a letter cancelling the contract. (At a later date we can discuss the emotional "stuff" you feel about this. Suffice it to say for now that this is NOT your best client. And they don't respect you. And they don't love you.

No matter what other story you tell yourself in your head, you have a financial relationship with your clients. If they stop paying you, they break that relationship.

Please take note of Absolute Truth of Life #2: Money owed to you can never have a value of one doller per dollar. In other words, you will collect less than the face value on ALL past due amounts. In mos cases, you will settle for less. But in some cases, you will pay an administrative assistant or a collection agency.

Old money is always collected at a discount. That's why it's critical to get paid in advance for as much as you can.

The sad truth is that we accept less than 100% of the money that's past due more than 30 days. So we end up giving a discount to the clients who pay late, while the client who pre-pay and pay on time are penalized.

What is your timeline? What's your process? Day 10, Day 20, Day 30, Day 60, etc.

Make this as automated as possible so that you don't get involved and extend the pain. Turn it over to your office staff and let the automated process take place.

Comments welcome.

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About this Series

SOP Friday - or Standard Operating System Friday - is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.

Find out more about the series, and view the complete "table of contents" for SOP Friday at SmallBizThoughts.com.

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Next week's topic: Sales Scripts

:-)

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