Like most entrepreneurs you started your business with a certain passion for providing a product or service. You have a conviction that you can do something better than what you saw others doing, or not doing in the market. Many people in your position believe if they provide a superior offering, they will be paid because customers will see them as the best choice among the alternatives in the market.
Most customers you have and will have are honest, hardworking and ethical in their personal and business relationships. As you grow your business however, you will come in contact with an ever-increasing variety of people and with the larger numbers things will get a bit more complicated.
Everybody you are, or will be doing business with is, in turn, doing business with or working for someone else. Everyone has a slightly different business model, value proposition, and background in business that orients them uniquely to their market. With all the varied backgrounds, experiences, education, training, and general outlook on life comes huge differences in the expertise needed to create and run a successful business. Some people know accounting, finance, some are engineers, sales people, or marketers. This diversity means everyone has “gaps” in what they know how to do or like to do. As human beings we tend to avoid doing what we consider our weak points because they don’t provide the much-needed reinforcement. Let’s face it, we are all in need of positive reinforcement, especially when we’re doing something as uncertain as creating a business; our livelihood and others depend on our success.
People also have widely different access to capital. Undercapitalization is a leading cause of small business failure. People underestimate what it will take while they are getting up and running. This need for capital is why banks, credit cards, venture capitalist, family and friends exist or are drawn into new businesses.
You offer a product or service you strongly believe is a fair value and you do business with customers or clients that are, for the most part, honest and value what you sell them. So far this is a simple transaction. As you enter ever larger parts of the market place you will inevitably meet and do business with people that:
- Are very good at what they do but not experienced running a business
- Under funded
- Overworked, overwhelmed and stressed
- Don’t have good bookkeeping practices
- Avoid asking people for money
- Have experienced a health problem or have a family member who has
- Have legal problems
- Growing too quickly
- Have lost a major customer
- Have lost a key employee
- Just moved their office
- Went through a computer system change
- Had a business interrupting calamity
- Etc . . . . . . . . . . .
The point is that you become exposed to all the potential downsides your customers are being exposed to.
This can be a rather scary proposition and is not appreciably different from all the unknown risk you might be exposed to working for someone else. This just part of business and life.
My first word of advice is to be systematic and prepared.
- Keep a file on each new and existing customer
- Document all conversations
- Do not avoid calls about money, or emails about collecting overdue invoices. This is an unavoidable part of ANY business transaction. In fact, a sale is not truly a sale until you get paid for it.
- When making collection calls, or engaging in collection correspondence, get the answers to 3 key questions each and every time.
- Why is the invoice(s) past due? Cash flow is NOT an answer. It is only a symptom of something else.
- Who is responsible for either resolving the issue raised in #1 above, or has the responsibility to authorize and pay?
- When will the item(s) be paid? Or, when will that person do the research and get back to you with an answer that will then allow you to continue the collection activity?
Document the name of the people you talk to, their title and date of these conversations.
An equally crucial task is FOLLOW THROUGH and FOLLOW UP. The distinction between these is that Follow Through is doing what you said you would do if your company failed to deliver what the customer expected. Follow Up is confirming people do what they say they would do.
Effective collection is actually another type of sale. You are selling someone on the idea of paying you for something after your product or service has been delivered. It requires the integration of your sales, operations, accounting and collections functions. As a general rule, most customers are honest and will pay you. Understanding and documenting why you experience collection problems gives you the chance to learn what is not working in your business. If delinquencies result from what you, think of it as a spot operational audit of sorts.
All the same problems you encounter running your business will at some time or another occur in your customers’ businesses. Document everything. Since most small businesses do not have the resources to do in-depth credit checks, it is crucial you keep your finger on the figurative pulse of your customers. Slow payment, i.e. cash flow problems, that occur because your customer is having problems will be more quickly spotted by regular collection contact and asking the right questions of the right people. Documentation gives you the ability to see trends over time and have documented evidence if more aggressive techniques become necessary.
Credit and collection activities also help identify customers poised for growth. During a growth phase customers are often stressed for free cash flow and extending additional days to pay or increasing a credit line are two ways to increase cash flow. If you proactively and constructively engage your customer at these times and are willing to take a calculated risk, you can cement a bond that can last the life of your business.
Vice President of Administration
Just in Time Direction, LLC.