If you have a lot of bad debts in your accounts receivable department, it's a symptom of something else you are doing wrong.
While the first reaction may be to jump on the collections department, what you should do is look at why you have bad debt in the first place.
"You are not in business to have zero bad debts, you are in business to make a profit," says David Sher, co-CEO of Amsher Collection Services and co-author of "Collect Debts and Still Keep Your Customers".
"If you have zero bad debt, you're being too tight with your credit and may be giving up a lot of additional revenue. But if you have a lot of bad debts or your delinquencies have increased, you need to look at why you are having problems."
Sher has created the acronym A.V.E.N.U.E. to serve as a guideline for lessening your number of bad debts.
A is for application. You may call it a client information form or something less formal, but it should have all the components of a credit application. You need this information from customers to help you decide whether to give credit, and if they don't pay, you need to know where and how to find them. A third reason is to find out where they heard about your business so you can refine your marketing efforts.
V is for verification. Make sure the information on the application is correct. If you think people only give good references, you're wrong. Call references to verify, and ask if they know of anyone else the person has done business with. That way, you can call that person and go one step beyond what the customer put on the application.
E is for expectations. This is one of the weakest areas for a business. Many simply don't go over the expectations for payment. Salespeople are afraid to talk about payment arrangements for fear of wrecking the sale. Customers might not have a clue what the payment requirements are until they receive the initial call from your company telling them they are past due. Explain what is expected before the sale is finalized.
N is for nice. Make a nice courtesy call as soon as the product or service is delivered. Ask customers about their satisfaction and if they know that if they pay by next Tuesday, they get a 2 percent discount. This is nothing more than a disguised collections call to reinforce your payment arrangements. If they aren't satisfied, you find out immediately, rather than three months after payment is due and they're not paying because they aren't happy.
U is for urgent. "We used to own a retail furniture business where people paid on credit," says Sher. "We sat down and looked at who paid and who didn't. The biggest determinate on whether a person pays or not is the first payment. If someone misses the first payment, they probably won't pay at all. Call immediately; don't wait 60 or 90 days."
If they are new customers, call immediately to remind them of the payment requirements. They will get the impression that you are so on top of things that being late won't be a good idea.
E is for exceptional service. It's the only thing that may differentiate your product from someone else's. If you have exceptional service, customers will come to you and stay with you because of it. If your service is bad, you will start giving in to demands for longer payment periods, or even price cuts, just to keep their business.
If you have a larger customer who accounts for the bulk of your sales, try to form a personal relationship with someone in the accounts payable department. If possible, take him or her to lunch or at least send a birthday card or make some other friendly gesture. That way, if you run into problems that are putting your business in a squeeze, you know someone there you can contact directly to find out what is going on.
One of the biggest mistakes smaller businesses make is relying on mail.
"Many businesses will say the accounts receivable are not coming in quickly enough, so they send out more mail," says Sher. "Mail is the poorest way to collect. You can send statements month after month, but even if you include past-due notices, you don't know if they got it, whether there was a problem, or what their plans are. You're just running up your postage bill and are not accomplishing anything.
"The telephone is the best mechanism, or better yet, go to see them personally. The phone is 10 times more powerful than mail," he says.
Another common mistake is starting at the wrong end of the collections pile on your past-due accounts.
"Call your most current delinquencies first, not the oldest," says Sher. "The chances of collecting decline with age. If you go to the oldest first, you have little chance of collecting. Meanwhile, all the recent ones are getting more delinquent and are moving back in the pile.
"It's an endless cycle. You are far better off dumping the old ones and forgetting about them -- or turning them over to collections. Put your resources on the most current accounts."
How to reach: www.amsher.com
Todd Shryock (firstname.lastname@example.org) is SBN's special reports editor.