We’ve just completed an assignment for a professional
services firm where we not only created their credit and collection policy
and procedures but also collected the majority of the outstanding account
receivable dating back prior to the year 2000. We originally took the
assignment in the latter part of 2004 as a short term project never
realizing that it would last almost eight years.
The majority of the time spent working on the clients’
receivables was fun and on more than one occasion a member of the firms’
professional staff would comment to us or others that we seemed to be having
too much fun in improving the firms’ account receivable condition.
We have found the majority of professional service
firms, legal, accounting, engineering, etc., tend to shy away from the
discussion of payment with their clients. It is assumed that when the client
contracts for these professional services that they will pay for them. Now
like every other purchaser of goods or services there is an intent to pay
but as credit professionals we all know that there are many roads paved with
good intentions. Unlike trade creditors, professional service firms tend to
take the client at face value and seldom, if at all, have the client
complete any type of credit information form and if they do, more often then
not, there is no investigation process. All too often, the firm is usually
faced with the choice of seeking professional assistance to collect the
remaining AR after the work has been completed or writing off whatever
unpaid balances remain. Surprisingly the majority of these firms will write
off what is owed rather than attempt to recover the balances.
It is rare today when a business that can demand
payment in full, in advance, before providing its product or services to
creditworthy customers. Although professional service firms often require a
retainer, an upfront deposit that they work against, often they do not
follow-up promptly when the retainer is diminished and thus find themselves
in an upside-down position where they continue to provide services on the
hope the client will be satisfied with the outcome and eventually pay the
amount owed for the work performed.
For the majority of businesses today, whether they be
proprietorships or large corporations, collection problems are ongoing,
sometimes annoying, and a part of doing business on credit. Collection
problems often will lead to diminished cash flow, a decrease in profits, and
worse case, bankruptcy.
In reality collection problems, especially the ones
being faced today and including our recent client can be significantly
reduced. The solution is a two step process involving the establishment and
enforcement of a payment policy along with a procedure to effectively
communicate the policy to all potential debtors whether they are customers,
clients, or borrowers.
Every business should have a payment policy as part of
its credit and collection policies even if it is not written or clearly
communicated. In addition to the sellers’ payment policy the credit
professional should recognize that there is also a buyers’ payment policy
and the reason that having the policy in writing is so important. The credit
professional usually learns of the buyers’ payment policy when the first
collection call is made and it usually sounds something like this:
“We’ll pay you what we can pay, when we determine we
can pay and if that is not satisfactory we will take our business to your
The credit professional must determine exactly how and
when the firm is to be paid, taking into consideration any special
situations peculiar to the organization or industry, and create a written
policy statement to that affect. Next and very important, there has to be a
statement of what the consequences will be if there is non-compliance with
the payment policy. Most policy statements, especially when it comes to
payment, lack consequences. If there are no consequences for not paying in
accordance with policy, the customer/debtor has no motivation to adhere to
the policy and will pay when they choose to.
Consequences can include; suspension of credit
privileges, assigning the past due AR to a third party collection agent,
charging interest and/or late fees, litigation in either small claims or a
higher court, and any other action to be determined by the outstanding
Once the payment policy has been developed and approved
by management, it needs to be presented to every existing, potential, and
future customer. There are many reasons for communicating the payment policy
with the customer. We want the customer to first and foremost know that we
have a payment policy, including consequences. Second, we want them to
understand the policy and how it works. Third, we want them to follow it,
and lastly, we want them to appreciate our straightforwardness of addressing
the issue of payment and thank us for it by sending us money when payment is
due without our having to contact them.
Achieving these objectives requires that the customer
provide us some type of feedback so we can determine if they not only
understand the policy but more importantly that they agree to comply.
One way to achieve this is by asking the customer if
they have any questions after the policy has been presented to them.
Sometimes they will not have any questions because they do not want to deal
with the answers. When that occurs we have to ask questions to obtain the
response we are seeking. A good question to ask the customer upon making
them aware of the policy is “several customers had questions about various
parts of our payment policy, what part of our payment policy is of concern
Even when their answer is that they have no questions
and fully understand the policy we should address any aspects of the policy
that may cause misunderstandings that could lead to slow or non-payment of
our invoices. This is when it is a good idea to clarify the consequences.
It is always recommended that the policy be signed by
the customer as an acknowledgement that they not only have they been
informed of the payment policy but that they also understand it and agree to
abide by it. By having them sign the policy we have created an agreement or
contract between the customer and credit not unlike the sales agreement.
When we have presented this procedure in our seminars
and webinars we are often told by the participants that even though the
concept makes sense there is not sufficient time to visit with every
existing customer and present policies and procedures.
The reality is that the policy will eventually be
addressed and the issue is, do you present it to them before or after the
customer is past due? The choice is therefore the credit professionals to
make. Advise the customer of the policy prior to their receiving goods
and/or services or inform them after they have the product or have received
the service and are past due. We know, based on experience, it is much
easier and takes less time to address the payment policy prior to the
customer owing money and usually with favorable results.
I wish you well.
David Balovich is an author, credit consultant, educator, and public
can be reached at
email@example.com or through the Creditworthy website.