A primer on how to collect overdue accounts

Uncollected payments from customers and clients can be a big headache for small businessmen who typically have limited capital resources.

“Maiksi ang pisi,” is how many of them describe their financial situation.

Thus delays in collection can endanger cash flow, slow down operations, and threaten the long-term viability of a business.

How do small entrepreneurs contend with slow collection?

Cash policy

Green Gold Enterprises, maker of SukaPinakurat condiments, pride of Iligan City, early on adopted a cash-and-carry policy. The policy did not only make the company more liquid and stable, it also enabled them to promptly pay their suppliers of vinegar and spices, mostly small farmers who need the money immediately.

Eureka Educational Products also deal with customers on cash basis.

“At SM, we are now one of the few suppliers given cash terms in return for five percent discount,” according to Chito and Aida Madrono, the mom-and-pop tandem behind the company.

For other retail establishments who typically take time to pay, the couple no longer deal with them directly.

“We go through wholesalers—some of them Indians, others Chinese from Raon and Binondo—who buy our products from us in cash and in turn distribute them to retail stores.”

Both Greengold and Eureka did not accomplish the feat overnight.

Aida recalls their early struggling days.

“We supplied retailers who gave us 60-day terms. However, this is seldom complied with. We used to wait for as long as 120 days to get paid.”

With sales revenue tied up, the couple usually had to scrounge around for working capital.

In time, as demand for their products grew, they were able to bargain for increasingly better terms.

“We have technically done away with our collection problems,” concludes Aida.

Greengold, for its part, had no market at first. The only outlets that accepted their products were roadside fruit stands. Eventually, large retailers took notice and approached the company, agreeing to be supplied on cash terms.

The lesson here seems to be: Offer a product (or service) so good the market cannot ignore it.

Other strategies

Some entrepreneurs offer special discounts and free delivery to customers who pay cash on delivery.

This is the case of Uptrend Company, an importer of food supplements from the US retailed locally. In effect, Uptrend has incentivized cash payments by giving as much as 15 percent discount plus door-to-door delivery.

Jerilyn Lucereza of Jing-Yan’s Enterprise, Negros Occidental, distributes her longganisa, tocino, chorizo and other food products to consignees whom she calls her business partners.

To minimize risks, she deals with a new, unknown customer on cash basis only. But to those who have earned her trust, she consigns up to P30,000 worth of goods. She makes it clear that by the third batch of goods delivered, the consignee is expected to have paid for the first two deliveries.

AsoyNarag, a Navotas-based taho manufacturer, describes the credit and collection system he uses with his team of taho vendors:  “I have these aluminum taho pails which I lend to vendors on condition they get their supply of taho from me. The vendors would get the taho on credit and pay back the next morning when they get their fresh supply. Those who have their own pails have to pay in cash.”

Danilo Capin, owner of a funeral home in Iligan City, has gone into the selling of pre-need plans for funeral services in cooperation with Pioneer Insurance Company. Obviously, pre-needs do away with collection problems at the point the service is needed to be rendered.

When e-preneur Leila Peltosaari of Tikkabooks.com needs to collect past due receivables, she lets her husband call up. He can be very firm, while she herself tends to be too nice.

However, with a big, established firm she supplies that takes a while to pay, Leila’s niceness seemed to have wielded magic.

“I called and explained that I was just a little guy trying to survive, so could they please help me by paying their bills on time. The woman who answered the phone said she would put a note in my file, and since then I have been paid promptly.”

GUIDELINES FOR EFFECTIVE COLLECTION

Here, adapted from businessknowhow.com, an online resource, are suggestions on what small businesses can do when faced with collection problems:

• Set policy and put it in writing. To avoid problems in the first place, establish ground rules for how payment must be made and stick to them. On the order form, brochure or web site, clearly indicate terms of sale and payment options. Set guidelines as well for how to handle checks and credit cards. The terms of payment should be clearly spelled out in the agreement or sales contract. Some businessmen would ask the customer to initial the payment policy section.

• Follow up, follow up, follow up. Usually, but not always, being persistent but relentlessly nice works. Make followup calls regularly, making it a point not to lose your cool.

• Evaluate the situation. You need to evaluate individual clients—their integrity, your previous or usual experience with them. It is possible an erstwhile good payer is just undergoing extraordinarily difficult times and has to be cut some slack. Keep communication lines open. Listen to explanations. Give him the benefit of the doubt and time to pay. Meanwhile, keep calling up and sending those reminder letters. But if months have passed and nothing happens, you need to do something drastic, like letting him know you are turning the matter over to a lawyer or a collection agency.

• Be persistent in trying to collect. You can listen to customers’ sob stories and even make sympathetic sounds, but you need to make it clear you are earnest in demanding payment.

• Be willing to sue. When all else fails, you might take legal action. This will show you really mean business. At some point, you have to stop trying to collect and charge it to experience. After all, there is such a thing as “bad debt” which all businesses should expect occasionally and be prepared to write off.

(The author handles the Media Bureau of the Small Enterprises Research and Development Foundation or Serdef, a resource hub for micro, small and medium enterprises. For more how-to-start-and-grow in business articles, visit www.serdef.org.)