As a business owner, the most important thing for you is getting paid. Unfortunately, it isn’t always easy. Often times however, some customers want to get everything for nothing, they don’t pay on time, or they have all kinds of excuses about why they can’t pay right now.
In fact, according to a recent study by the Urban Institute, around one in three Americans has debt in collections. This means that they have been reported for not paying a bill. As a business owner, it gets old really fast.
However, it isn’t all the customer’s fault. You’re responsible too.
If you don’t have the proper systems in place in your accounts receivable department, you’ll likely run into cash flow issues and have a harder time staying in the black, than a company with an efficient system.
That’s something that I learned the hard way.
Over the years, I’ve found that these are the five most common mistakes that you might be making with your accounts receivable.
Not Having an Accounts Receivable System
Like other aspects of life, having a system in place is the most efficient way to ensure that you get paid.
Unfortunately, many contractors don’t really have a system in place.
Their “system” is usually to go through their list of who hasn’t paid and call them up one by one to try to secure their payment. If that’s been your system, you know how well it works. You probably just get a bunch of people who keep promising that they’re going to pay. The phone calls continue, the excuses pile up, and they still don’t have their payment after their 45-day period.
A solid system solves that problem. In my company, we have an automatic system in place. We start by sending out the first email about how the customer’s payment is still due, and the emails start to get more strongly worded from there if we still do not receive a payment. They get an email every week asking them to pay, and then the third week reminds them that that we have lien rights which may be enforced.
Not Having a Late Fee
It sounds so simple, but most companies don’t have a late fee for payment. Most contracts for home service projects are ‘due upon completion. You should do your part and honor the contract, and expect your customers to do their part. I highly recommend that you include a late fee per your contract to where you can charge around $75 to $100 if they don’t pay upon completion.
If your customer has been unresponsive, sending them an invoice with the late fee attached usually gets a call back pretty fast. You don’t even have to enforce that often, and I rarely do but it’s good to have to get attention should you need to.
Not Having a Solid Contract in Place
I can’t stress this one enough. Do. Not. Do. Business. Without. A. Solid. Contract. In. Place. However, just having a contract isn’t enough.
You need to spell out exactly what you’re doing for the client in the contract. Without those specifications, there are often discrepancies in what you think you told the client and what the client thinks that you told them. Without that contract in place, you’re opening yourself up to all kinds of pains in the ass. Protect yourself. Call a lawyer if you need to.
Not Securing a Lien Right
In the process of writing up your contract, an important addition to have in there is the right to place a lien on someone’s property if they don’t pay you what they owe. In essence, a lien is the right to keep possession of someone else’s property until they pay off the debt that they owe to you.
So, if you have placed a lien one someone’s property for $1,000, that person cannot sell their home until they have paid that debt. If you try to secure a lien without having the proper verbiage in your contract or notices documented, you’re likely going to receive a letter from a lawyer telling you that they’re going to sue you for filing a fraudulent lien.
So, check what you need to do in your specific state to ensure that you can place a lien on your client’s property if they don’t pay you.
Not Accepting Credit Cards
It’s 2017. It’s in your best interest to accept credit cards as a form of payment. Until recently, we only accepted credit cards on projects up to $1,000. With hurricane Irma affecting my service area, and the need for convenience when many folks wanted things fixed quick, without waiting on snail mail, I opened up the flood gates to accepting credit cards on everything. Although I didn’t want to have to mark up the costs on our services just to accept credit cards, I’ve found that accepting them has a few major benefits.
The first is that it signifies to customers that you’re a legitimate business. Most people won’t mind the 3% upcharge that they have to pay to be able to put the purchase on their credit card. It also provides them with the feeling that they have a little bit of protection. If they pay you with cash or a check that you’ve already cashed, they don’t feel like they can get any money back if something goes wrong. With a credit card, they can dispute that charge and get their money back if they really need to.
Finally, your customer avoids the “pain of paying” phenomenon. In this study, researchers found that people find it much less painful to pay for things with credit cards because the money doesn’t feel as real to them. When someone has to send in cash or a check to you, they don’t want to do it. However, if you have the option to charge a credit card, they don’t mind as much. This comes into play for the final balance. With proper documentation and notification, you can charge the final balance on completion. While you are paying the merchant fee on it, customers who avoid that “pain of paying” are less likely to ‘find’ punch list work, and leave positive reviews.
Putting it Together
While you may have been able to get away with not having a proper accounts receivable system in place when you were a smaller operation, the headache is only going to increase with the more money that you bring in. Do yourself a favor and design an accounts receivable system that makes your life easier, gets you paid faster, and lets your customers know what is expected of them.
Let us know how you’ve designed your accounts receivable system in the comments section below!