Monday, May 19, 2008

What do you do when you don't get paid?

It's easy to get so caught up in billing that you fall behind in collections. Realization, a key financial management metric- asks "what percent of what you bill do you collect?" Until an invoice is paid, it is a receivable. You can see that no matter how much you bill - if you don't collect, you aren't in business.

An accounts receivable (A/R) process is based on a fee agreement, but it really starts when an invoice is sent out.  At that moment, you've created a receivable that should be tracked through to collections. Here are the primary components of an accounts receivable process:
  1. Payment policy - when is payment due? This should be on your invoice and in your agreement. (Morgan/Foonberg in How to Draft Bills Clients Rush to Pay recommend using "Total Now Due" and "Total Now Due and Overdue" on invoices) 
  2. A/R aging report- at least once a month you need to pull a report of all outstanding balances and the days they are outstanding. This is to prioritize collections and to help you manage cash flow. Set this up as an ongoing part of your billing process.
  3. Collections process - action you will take for each category of aging. Actions might include issuing an overdue bill, writing a note on the overdue bill, making a collections phone call, negotiating options for payment and payment plans, and the like. 
  4. Write-off policy - when will you deem the invoice uncollectable and write it off?
Act on overdue bills immediately; it becomes harder to collect as time passes. Don't be shy about collecting, you have earned the money, this is business, your client agreed to pay you. Don't let it slide because the amount is small or you "know the person will pay eventually". Create a standard process. Yes, I have heard of people who resist paying until they "have" to; they are hoping you never come to collect!

Managing accounts receivable is part of your job as CFO. You can delegate it if you have staff or if your accountant provides the service- otherwise, you need to plan the time to get it done. As always- put it on your calendar, in your CFO timeblock.

If you're owed money, start monitoring the outstanding balances and taking action every month on a scheduled basis. Once you've cleaned up any outstanding invoices; you'll find that managing the problem will prevent it.