Accounts Receivable Nightmares: Collecting on Delinquent Accounts

By Nora Dunn on 6 August 2009 (Updated 26 April 2010) 7 comments
Photo: iStockphoto

How do you collect on delinquent accounts without damaging the customer relationship? How do you manage the balance between keeping a steady stream of new clients coming through the door, servicing your existing clients, and keeping the accounting books even? Issues such as cash flow management, administrative organization, and the ability to set firm payment terms will contribute to the ease – or lack thereof – of managing your business and collecting successfully on delinquent accounts.

You could have the greatest business and platform ever. In fact, Barbara did. She had a mini-monopoly in her area of expertise, and had all the new and repeat business she could want. But she couldn’t turn a profit – a tangible one, anyway. The books said she should be laughing, but her cash flow said otherwise. Why? Because Barbara was working so hard doing billable work, that she was unable (or possibly unwilling) to do what it took to ensure her clients were actually paying her. She figured that in their shoes she would promptly (or at least eventually) pay an invoice that she received, and assumed that her customers would do the same. After all, she had a great relationship with her customers; they wouldn’t try to stiff her, right?

Sadly, the world of business doesn’t always work this way. There are customers who will be tough to collect from, sometimes from forgetfulness, lack of funds, or lack of organization. Other times they simply don’t want to pay up and won’t unless they think they have to. It’s sad, but true.

Here are a few techniques you can employ to give your clients and customers the best chance to pay you on good terms.

Invoice

Although this may seem to be a rudimentary suggestion, the trick is to invoice consistently and constantly. No matter how large or small the amount is, an invoice must be issued. It is easy to waive off small billable amounts, or say that you will simply add it on to the next bill, thinking that you will save time, aggravation of banking a small amount, and expense in issuing and sending an invoice.

But eschewing small billable amounts in favor of adding them to a later invoice can backfire in the following ways:

  • The customer could forget about and fight the charge, when it eventually gets invoiced.
  • The customer might not come back (due to circumstance or otherwise), and you may not get a chance to bill for the event at all.
  • The customer might have a more difficult time paying one big bill than they would paying two smaller bills; hence making collection on even the new (and larger) invoice amount tricky.
  • You might just forget to bill for the smaller amount at all.

And although smaller amounts seem petty to collect on, they do add up. The customer initially came to you expecting to pay you for your services, so you should be accordingly prepared to bill them for it.

Invoice again, and charge interest

If 30 days lapses since you sent the first invoice and you haven’t received payment, then send another invoice. Although it may seem like an exercise in futility, the following could have happened:

  • The customer never received the first one.
  • The customer filed it away and innocently forgot about it.
  • The customer filed it away, hoping that you will forget about it.

As an answer to these scenarios, issuing a second invoice – and advising that you will charge interest on the balance if it is not paid by a certain date – can be enough motivation for your customer to pay up.

Follow up tenaciously and shamelessly

The second invoice must be followed shortly thereafter (e.g. a week later) with a phone call. Depending on the customer relationship, email may be appropriate, but is just as easy to ignore as an invoice is; if the customer is being difficult, then facing them on the phone (or even in person) can be a more effective way to encourage them to pay up.

Sometimes a customer might have extenuating circumstances that preclude them from being able to pay promptly, but which they are embarrassed to initially divulge. Speaking on the phone with them could solve this issue, and together you can work on a payment plan.

Pick up the check

While following up with your customer, they may come out with the classic “the check is in the mail” line. Sometimes this is true, sometimes not so much. If you believe the customer is trouble, ask when your courier can pick up the check instead. This means you are serious about getting your money.

This could involve a tough judgment call on you part. You like most of your customers (even the ones that don’t pay), and you certainly don’t want to endanger the relationship and ability to get referrals. The trick is not to let a bad situation drag on because you don’t want to pressure your customer into paying you for work you have already done. (Operative words here: paying you for work you have already done; you should not feel bad or awkward about asking for what you deserve).

Cash on delivery for problem customers

If a customer has historically been late to pay up, or if you have reason to believe that they will be especially difficult, avert the crisis before it begins by requesting cash on delivery. If an existing customer has something to say about it, simply inform them that it is a new change in policy.

And if the customer in question already has an outstanding invoice, then you have every right to state that until the original invoice is paid, all future work must be paid up front in cash. If the customer doesn’t like it (especially after you have gone through the steps above to resolve the issue), then they probably weren’t prepared to pay you anyway, and you potentially saved yourself another billable event that you might never collect on.

Ideally, you want customers that pay promptly, and you want those customers to refer you to other ideal customers. Delinquent customers will rarely lead you to ideal ones, so don’t be afraid to cut them loose.

Set a firm policy for new customers

Bending over backwards for new customers in order to secure the business or relationship will only lead to trouble farther down the road. If you set a firm payment policy up front, then customers won’t be surprised or offended or feel that you distrust them – they will simply adapt. Initial deep discounts or lenient payment terms sets a precedent that is incredibly hard to break.

Be Confident!

It is a small measure, but approaching your customers knowing that you provided a valuable service for which you deserve to be paid will translate into quicker collection on accounts. Subconsciously, vultures (i.e. delinquent customers) will prey on those who put up the weakest fight. As a survival of the fittest, the rules of business differ little from the laws of nature

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Guest's picture
MichaelM

As a printer in a small town, my dad had a restaurant owner that didn't pay him for new menus, business cards and advertising.

When my grandparent's anniversary came around, he brought the whole family to that restaurant. When the bill came, he told the waiter that he'd take it off the restaurant owner's tab at the print shop.

From then on, it was cash up front of course, but for the money he was already owed, it was easier than arguing with the guy.

Guest's picture

Thanks for this post. As I start doing freelance editorial work, this is an issue that I expect will come up. This is great advice for dealing with slow clients.

As the former accounting/bill-paying manager of a small nonprofit, I can attest to the fact that sometimes we simply forget to process an invoice. A phone call always works better than an email. And I agree that you should invoice small amounts as they come up--otherwise, the company's own accounting mechanisms could be screwed up by receiving a larger bill than expected.

However, I'm surprised by the advice to charge interest on delinquent invoices. Is that widely done? I have never had a company or consultant charge my company interest for a late payment.

Guest's picture
Timothy McCormack

Having all your tactics exhausted, where would you turn as a final recourse. Is small claims court, collection agencies or other such third party involvements worth it. Or would it be better to eat the loss (depending on the amount owed I assume)?

Guest's picture

I realize it's not always feasible but in certain small businesses, it's become more and more common to require a credit card up front, even if you extend terms. Make it very clear that you will invoice the client, but if you don't receive payment by X days, then you will charge the cc. The first time you're forced to do this, they will pay more attention and usually be more careful to not let it happen again on future orders.

And small claims court does work. My husband and I ran a typesetting company eons ago, and had almost that same thing happen as described in the first comment - we'd done menus and all sorts of related print matter for a little Greek restaurant in town, and the owner wouldn't pay. Eventually we won and the sherriff paddle-locked the business until we got our check. It wasn't fun, but we did get paid :)

Guest's picture
AJ

This reminded me someone owes me money for my freelance writing. I really need to create a formal policy or process for this all.

Guest's picture
Lucille

If your handing over work or a project, getting paid before you hand it over can solve much of this. I write it into contracts that way.

Nora Dunn's picture

Thank you for the comments!

As for the final recourse, it depends on where you live, as to whether small claims court etc will be viable options. It also depends on the amount of the outstanding account. Sometimes (if it is a smaller amount) it makes more sense to write-off the debt (which can be a tax deduction in some cases).