Businesses that sell services operate in an environment that is different from industries that sell goods or tangible commodities. A services enterprise has no physical product with which to collateralize or finance the business operation.
The company’s most significant costs – payroll and benefits – are paid currently, as opposed to being leveraged through accounts payable, bank lines of credit, or other traditional methods of financing that are tied to tangible assets. Therefore, revenue mostly trails the outflow of funds spent. That makes effective management of accounts receivable even more critical for service providers.
There are several keys to managing accounts receivable, which apply to any organization:
- Set credit policy objectives. Determine what you are trying to achieve, in specific terms.
- Calculate how much credit the enterprise can afford to offer.
- Classify or grade customer credit-worthiness.
- Monitor collection activity, period by period.
- Establish and follow standard collection practices, including notations for all customer contacts – especially when resolving a dispute.
For companies in the services industry, here are some best practices to manage client relationships and keep your accounts receivable collection process running smoothly:
- Establish with the client a clear understanding of the service to be performed and ensure the fees are agreed to in writing before starting any engagement. If the term of the engagement is sufficiently long, add payments at milestone events or dates in the contract. Guidelines and templates for written engagement letters can usually be found on the website of your industry’s professional organization.
- Qualify new customers by obtaining the appropriate intelligence to assess their ability and willingness to pay. Use references or credit rating services when it’s appropriate.
- Develop a collection policy early and apply it consistently. A clear and consistent approach allows those who sell your service or monitor accounts receivable to point to company policy and its consistent application at the start of a new client relationship or when a follow-up is required.
- Work on potential problems right away.
- Maintain a positive attitude and approach during any collection calls. When collecting bad debts, clarity and honesty are good business practices. This approach may also keep your company free of a potential claim of harassment from the debtor.
In a services business, the financial rewards for owners – and in many cases the ability to distribute bonuses to key employees – are directly linked to timely and effective fee collection. The steps outlined above are preventive measures. They are also good business habits paramount to the success of any business. Clarity in dealing with clients, consistency in applying company practices, and patience are always good practices and will increase your chance of success.
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