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Improving Your Collection Cycle

Collecting overdue accounts is, for many small business owners, the most unpleasant task of all. The task is unpleasant for two main reasons: because keeping track of which accounts are overdue can be so difficult, and because most people don't enjoy pressing others for money.

While we may not be able to make debt collection pleasurable, we can make it a whole lot less painful for you. We can make it less painful both by showing you how to keep better track of your overdue accounts and by suggesting how you can improve your collection techniques.

Organization. That whole process of identifying overdue accounts and taking steps to collect your money is called your collection cycle. The best place to start improving your collection cycle (or, if you're just starting out, to build an effective collection cycle) is to get organized. Probably the most common reason why collections get out of hand is poor organization. If you have a lot of customers buying on credit and they buy from you throughout the month, each with different terms, keeping track can be extraordinarily difficult. However, there are a number of software programs on the market that can greatly simplify this task.

  • Tracking overdue accounts: the key is to develop an effective means of knowing when accounts come due and being able to keep track of who pays their bill and who doesn't. This is half the battle.
  • When to call your lawyer: once you can keep track of your accounts, the next step is to set up a system for determining which accounts to handle yourself, which accounts to turn over to a collection agency, and which accounts to send to your attorney (you don't have to use all three; you can handle everything yourself, if you want to). Lawyers, though often effective, also can be expensive. You'll have to determine which is the most effective way for you to get the money owed to you.
  • Paying lawyers and debt collectors: generally, either of these collection experts will require a percentage of any debt they collect.
  • Streamlining your tactics so that you don't waste time, effort, and money: a lot of collections experts will tell you that you need to start your collections process with a series of letters that grow ever more threatening. They'll tell you that if your customer fails to respond to, say, the seventh letter, you turn the account over to your lawyer. But as a small business owner you may not have the time (not to mention the patience) to send so many letters to so many people. Also, keeping track of which letters have gone to which customers just adds another layer of complexity to the process.
  • Avoiding the legal pitfalls: If you collect your own debts, you'll have to tiptoe around several laws that protect consumers from certain debt-collecting practices that are considered overly burdensome or unreasonable. If you collect primarily from other businesses, you won't have as many concerns.
  • Dealing with uncollectable debts: When should you throw up your hands and declare a debt uncollectable? if a debtor seems to have left town, there are ways of tracing him or her. But if the debtor declares bankruptcy, you may be out of luck.

Follow these basic rules, and you'll soon be behind the wheel of a well-oiled, fine-tuned collection machine.