Creating an Effective Collection Policy

Cash flow is the lifeblood of a business, and an effective collection policy is essential to keeping the money rolling in. Whether you are looking to improve your existing strategy or starting from scratch, consider these tips for implementing a successful policy:

Be proactive. Create your collection policy before you extend credit to your first customer. You're going to run into payment problems from time to time, so be prepared.

Use it or lose it. It's a fact: The longer you wait, the less money you'll collect. Begin your collections procedure as soon as you notice a delinquent account. Start calling customers the day their invoice becomes past due, and call them every day until the bill is paid. Most people will pay persistent creditors first.

Send a letter. Develop a template for each letter so you can easily fill in the blanks and send it out when an invoice is 30, 60 and 90 days past due. Sending letters lets your customers know you take your collections seriously, but it will also help you document the process in case you need to take legal action. If the bill remains unpaid, have your lawyer send a final demand for payment, stating that legal action is your next step.

Bend, don't break. If a good customer is occasionally late with a payment, be flexible. Do continue to call them to request payment, and set up a payment plan if necessary. Resort to extended payments only in emergencies.

Get rid of dead weight. A slow-paying customer can be worse than no customer at all. Once you figure in the time and energy you spend tracking and collecting their outstanding invoices, these delinquent customers may be actually costing you more money than they're worth. Cut them loose.

Call a professional. Collection agencies can be very effective; in many situations, a business will gladly pay rather than risk further damage to their credit rating.