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 competitor”.

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 amount owed.

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 to you?”

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 speaker.
He can be reached at 3jmcompany@gmail.com or through the Creditworthy website.