By: Beau Brincefield
Operators of small businesses are frequently shocked to find out that a booming market for their goods or services does not necessarily mean a profitable bottom line. What counts in the final analysis is how much money ultimately goes in the till. If you cannot collect what you are owed, you would be better off not making the sale in the first place.
The first thing that the small business man or woman needs to recognize is the fact that, unless you are getting paid in advance for your goods or services, you are extending credit to your clients and customers. And the initial decision whether or not to extend credit is an important decision which should be handled carefully. Adopting a few simple practices and procedures when you first extend credit to a client or a customer can dramatically improve your collection of delinquent accounts.
The key first step is to develop a simple written purchase order form which accomplishes several critically important objectives:
First, it provides written evidence of the contractual agreement between the parties. Second, it provides an easy way to obtain some basic information about the customer and/or his or her company. Third, it can obligate the customer to pay the cost of collection, including interest on any delinquent account, if you have to take legal action to enforce payment on the account. Fourth, it extends the statute of limitations on the account from three years to five.
All of these objectives can be accomplished with a simple, one page form.
Getting basic information about a customer, such as his name, address, home and office phone numbers, date of birth and social security number, makes it virtually impossible for the debtor to disappear. With all the computer data bases that are now available to investigators and law firms, it is almost impossible for someone to hide if you have this basic information about him or her.
Most people don’t realize that, even if you get a judgment against a customer for the payment of a delinquent account, you do not automatically get awarded either the costs of the collection or interest on the delinquent account. As a result, due to the delay and costs of collection, even when you win a judgment against a delinquent customer, and even when you make him pay the judgment in full, you, the creditor, may ultimately get only twenty-five to fifty percent of the total amount truly owed by the debtor.
It is relatively easy and inexpensive to develop and use a simple credit application/purchase order form, but it can dramatically improve the collectability of your accounts.