Elie Kochman on Business and Networking

A while back, I wrote an article about Managing Accounts Receivable, focusing on management from the perspective of growth of a business. In today’s article, I’m going to discuss collections and getting paid for the work you’ve done.

In order to give yourself the best possible chance of being able to collect, you need to ensure that you have a clearly worded contract, in which it is outlined what you are to deliver to the client, the amount to be paid by the client, and how and when that money is due. In case of dispute, such a document will play a crucial role in determining whether or not you can collect your money.

Assuming you have such a document, and the client is not making the proper payments, you should attempt to open communication by asking the client, politely, why the payments have not been made.

It may be an honest error (in one case, the client had assumed an invoice I sent him had been copied to his bookkeeper, when in fact it hadn’t been). In that case, the question regarding payment can be quickly resolved.

It might be an issue of timing – the client was deferring payment for cash flow reasons, and had forgotten to inform me that the payment would be late.

It could be related to cash flow and ability to pay – the client might not have the funds to pay the invoice, and is embarrassed to discuss it. In that case, by opening conversation, you can work out an alternate payment schedule to ensure you get paid.

Last, it could be that the client has no intention of paying. If this is the case, regardless of the reason, you need to look to other options other than merely talking to the client. (You also need to get rid of the client – read my article Firing Customers for more information on that topic.)

First, you can choose to write off the money owed as a loss. While this doesn’t regain any of your money, it does keep you from having to pay taxes on that money, which at least keeps you ahead of any future expenses on that particular account.

Second, you can hand over the funds to a collections agency. The cost here is usually a percentage of the money recouped by the agency, often as high as 50% of the money paid. Going this route is often not worthwhile to small businesses, as it generates very negative views of your business in the eyes of potential clients.

Third, you can sue the client. Here in Ontario, if it’s a relatively small amount (as of this writing, the maximum is $25,000), then you can sue them in Small Claims Court, and you don’t need a lawyer. In this case, you may be given the option of seizing the assets of the client to pay for the amount owed. However, the amount of effort involved is significant, although the direct cost is not, since the client may be ordered to pay the court expenses if you win the case.

Whatever option you choose, and each case needs to be handled on its own, you need to remember to always act professionally, and to assume that every document and e-mail that you handle may end up one day in court. If you treat the client with respect, and give them alternatives to defaulting on payment, you may find it easier to get your invoices paid.

Several months ago, I wrote an article The Customer is Always Right… Sometimes in which I discussed many of the reasons a business should be listening and obeying its customers, even when it seems to go contrary to what the business stands for. However, there are times when not only is it inappropriate to listen to the customer, you should also get rid of that customer as fast as possible.

The first example is where you sell a product, and on occasion, will be asked for a refund. While you need to have a clear refund policy, you also need to know when to give in and issue the refund anyhow. A customer who won’t be happy, and is out of pocket because of your business (whether reasonable or not) is capable of generating a lot of negative attention for your business. Issuing the refund to get the customer to leave you alone will often not only rid you of an annoying customer, but also generate positive feedback for good customer service.

OK, so the first example wasn’t really about firing customers, but about having good customer service. Here’s another example.

If you do work for a customer, and they don’t pay – get rid of them if you can. A good customer who can’t pay will be upfront with you about their situation, and try to arrange alternate payment schedules. A bad customer will keep taking work, thereby driving up their balance, and not mention that they cannot pay the bill. The problem with such customers is that many of them try to justify their position and explain that they don’t actually owe you the money. In other cases, they will ask for special treatment to get their bill reduced.

It is not in your best interests to do either. When you are out of pocket on a customer, and realize that you will have difficulty collecting, you need to stop. You need to stop working for the client, you need to stop arguing with them (and yes, such situations usually end up with grudge matches, often held through long sequences of e-mails) and you need to just issue a notice that payment is due.

Be polite. Tell the client that you will not be doing any more work for them until full payment is received. Give the client any outstanding material of theirs that they may not have (for example, if you’ve collected data as part of the project, send them the data – even if that’s not part of the contract). Tell them when you expect payment by.Tell them what’s going to happen if they don’t pay (for example, I’ll sue you for the shirt off your back!).

Here’s another example where it’s wise to get rid of a customer.

Sometimes the issue is not that the client can’t or won’t pay, but that the work being done does not match the work requested originally. In that case, if discussing with the client to resolve the differences doesn’t improve the situation, you may want to stop the project. If you do, then you can try referring them to someone else who can better serve their needs. As an example, if you run a business doing SEO and SEM work, but the project turns out to be website development, then you may want to refer them to a web development business.

Sure, you may lose the project as a result, even the parts that were your forte, but at the end of the day, you’ll have less aggravation as a result.

It’s early 2010, about the time that bonuses are paid, and you may be wondering what to do with the extra cash. Hopefully, you weren’t depending on the bonus for your budget, and so you can use it for some of the long-term plans you have.

There are, essentially, three uses you can put the extra cash to:

1. Splurge it on something – it’s extra, you don’t have a long-term plan for the money, so why not enjoy it.
2. Save it – the extra $5,000 might help toward a down payment on a house, or pay for your child’s university.
3. Pay the debt – after all, it costs you to keep that debt around, and if you’re like most people, you don’t like owing other people money.

Now, each person’s situation is unique, and there’s no rule for what to do. However, I’d like to address a reason to save when you might be inclined to pay debt which you may not have thought about.

Assume for the moment that you have a $5,000 balance on a line of credit which you pay 5% interest on, and you just received $5,000. The current rates of return on a GIC are about 2%, which means that by paying off your debt today, you’ll essentially save yourself 3% annually on ridding yourself of that debt today.

However, look at your monthly obligations to that line of credit (and this assumes that you are not continuing to borrow against it). On $5,000 of debt, your minimum monthly payment is probably in the area of $150 to $200. This is already in your budget, and you are already setting aside that money each month.

If you pay off your debt today, you will, in theory, free up that money to invest in a long-term plan. However, saving money is generally not treated as an obligation, while paying a debt is. That means that if you remove this debt from your monthly payments, you are not as likely to put the money into an investment.

For that reason, you may want to consider putting a portion of the bonus into an investment today. Sure, it’s going to cost you 3% to do that, but this way, you’ve managed to save that money, which otherwise might have been spent. If, on the other hand, you can convert your monthly payments for the line of credit into a monthly contribution to an investment, thereby ensuring that you do, in fact, contribute the savings each month, then by all means you should get rid of the balance on your line of credit as quickly as possible.