Wednesday, October 17, 2007

Managing Collections in a Small Business

Horror stories about the treatment meted out by Debt Recovery Agents to loan defaulters have been in the papers recently. While banks and financing institutions have a mechanism in place (regardless of the flaws) to recover their dues, what can a small business owner do when faced with a similar situation?

Managing collections can be a tough ask in India. New businesses or small time traders, which don’t enter into formal contracts, are at great risk of not being paid on time. Even if a contract does exist, fighting a court case against a defaulting client is in most cases an unrewarding and long term exercise.

Prevention is most definitely better than cure. Here are some suggestions:

Formal documentation is a must. A contract not only serves to protect interests, it also serves as a written guide of the responsibilities of both parties. Often, disputes arise because of differing interpretation of scope, payment terms, quality standards etc. A written document helps circumvent this to a great degree.

Maximise trade terms. Understand trade practice. If others insist on some advance payment or cash on delivery, you should follow suit.

Follow up on time. Vendors, especially when they’re new, fight shy of asking for payment for fear of straining the relationship. This only opens up a window of opportunity to the client to extend credit terms, which then becomes a precedent. Don’t allow the customer to think that you don’t take collections seriously.

Be accurate. Any error in invoicing will give the customer an excuse to delay payment. Institute a formal billing process right from the start.

Have someone else do the follow up. As head of the business, you need to maintain relationships and therefore distance yourself from “sensitive” issues like following up for payment. Therefore, have someone else do it for you.

Don’t let it slip away. If things look like they’re going out of control, force the issue at a time when you might hold the upper hand – for example prior to an important delivery deadline. If things don’t sort themselves out, take a call on pulling out of the relationship. As a last resort, be prepared to write off at the earliest, so that you can at least recover something by way of reduced taxes.

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