Minimizing bad debt risks: having a reliable collection policy

Many people starting out in a service business are more interested in performing their service than developing a clear credit, billing and collection policy. A lot of new business owners have had no previous business experience and do not realize the financial pitfalls that can occur.

Having a credit system that works is essential to your financial survival. It does not take many bad debts to completely eliminate the profit of the business for the whole year. In more serious cases, you could go out of business if a substantial debt owing by a client is not paid.

There are several effective techniques to minimize the risk of bad debts with careful pre-planning at the outset. The underlying message is the simple. Be clear on your credit policy and communicate this at the outset of the arrangement. Then be consistent with your policy and maintain effective communication throughout your business relationship.

Avoiding Client Misunderstandings on Fees

Effective communication is vital in order to minimize client misunderstandings about fees. Many people feel uncomfortable discussing money matters. It is important that the amount of money you expect is understood and agreed upon by the client before you commence work.

Three ways to eliminate misunderstanding on the issue of services performed for fees are through effective communication, written contract or letter of agreement, and a clearly detailed invoice.

Advance retainer

A client can be asked to pay a retainer or deposit of 20% to 50% or more of the total contract amount prior to the work being performed. This can be justified on the basis that if you are going to schedule in a commitment to the client, it is your company policy to require an advance commitment retainer. This is also an effective technique for protecting yourself from a new client who might delay payment or who doesn’t pay after the work has been done.

Prepaid disbursements

Depending on the length of the job and type of client, you may wish to request prepaid disbursements if they are going to be sizable. Alternatively, arrange to have your client pay for large expenses directly. Do not carry the client’s out-of-pocket expenses at the risk of your own cash flow. It is one thing to lose your time; it is another thing to also be out-of-pocket for your own funds.

Progress payments

It is common to invoice at specific points in the project. The stages at which progress payments are to be paid would be outlined in the contract. Statements can be sent out on a weekly or monthly basis, depending on the circumstances. This also provides you with the advantage of knowing at an early stage in the project if the client is going to dispute your fees, and at this point you can either resolve the problem or discontinue your services. It can be very risky to allow substantial work to be performed or waiting until the end of the project before rendering an account.

Billing on time

Generally a client’s appreciation for the value of your services diminishes over time. This is a common problem. It is important, therefore, to send your bill while the client can see the benefit of the service you have provided.

Monitor payment trends of clients

Where regular monthly billing is the case, record and monitor the payment patterns of clients so you can watch for trends that may place your fees at risk. If you see an invoice is more than a week or ten days overdue, communicate with your client. Begin the various steps of your collection system immediately.

Personal guarantee of principals of a corporation

Depending on the project and client, you may want to have the principals behind a corporation sign a formal contract as personal guarantors. Another variation is to have the contract in the name of the corporation and its principals as co-covenantors of the contract.

Try to involve the client in some fashion during each step of the project. By making your client aware of your services, benefits, time, and skill, you should minimize problems that could occur because of an unbonded or remote relationship.

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