Dean Kaplan is president of The Kaplan Group. He writes about business debt collection & contract negotiations & provides financial advice.
If you’re part of the leadership team guiding a fast-growing startup, financial health is a constant concern. Early on, your company’s ability to attract new capital in successive funding rounds may have been the strongest indicator that your business was destined for success. Over time, these measures must evolve with your business. Sales, revenues and cash flow will reveal whether your products or services have found their market, making it possible for you to turn a profit.
When sales results appear strong but cash flow lags, unpaid receivables are often part of the picture. Late payments affect half of all B2B sales made in the U.S.—a fact many startups don’t realize until they’re in serious accounts receivable (AR) trouble.
Early Mistakes That Expose Startups To Nonpayment Risks
Unpaid customer invoices are common problems for new companies. Many founders are so focused on fundraising, product development and reporting requirements of venture capitalists that they overlook billing and collections fundamentals. To build early revenues, startup principals might:
• Do business on a handshake rather than requiring new customers to sign contracts.
• Offer trade credit to new clients without vetting their financials.
• Allow sales reps to work in a silo, free to pursue prospects who may lack the ability to pay on time.
• Fail to hire an experienced billing team or provide them with the systems and resources they need.
8 Steps To Reduce AR Risks And Protect Cash Flow
The best way to minimize your risk of past-due or unpaid receivables is to build a solid infrastructure from the start. Here are eight steps that prevent late payment and help control the serious losses you can incur when you’re forced to write off bad debt.
1. Define your target customers. Construct profiles that carefully define the customers and markets your new business team should pursue. Make sure the products and services you offer are closely aligned with their demonstrated needs. Focusing on financially healthy companies in your chosen markets is the first step in building a base of customers who will pay on time.
2. Hire qualified professionals to manage receivables. Whether one person or a small experienced team, your team will be responsible for setting credit acceptance policies, managing and tracking invoices, resolving billing-related questions and negotiating with customers so that short-term issues don’t turn into long-term collection problems.
3. Make sales and customer care a shared responsibility. Require billing and sales teams to collaborate to acquire and retain profitable accounts. This can prevent payment problems and boost customer satisfaction.
Give your billing manager the authority to enforce credit terms, but emphasize communicating with clients to resolve billing questions or disputes. Many unpaid invoices can be traced back to a customer’s dissatisfaction with goods or services delivered or questions about charges on a particular invoice. Getting these resolved quickly can prevent costly defaults.
4. Map out a credit acceptance process that minimizes risks. If you choose to offer trade credit, it’s crucial to know that you’re essentially offering a short-term loan to your customer at zero interest. This is a risk no startup should take without confirming the customer’s ability to pay.
Lenders look at the 5 C’s of credit when they’re underwriting loans. While your criteria may be simpler, you need to perform a thorough financial review. Ask applicants for business and bank references and current financial statements. Run a credit check and look for past problems involving late payments. Clients who don’t meet your acceptance criteria, or are too new to have a solid credit history, can start on a cash basis or opt to pay with credit cards.
5. Require customers to sign credit agreements. This confirms they are entering into a legal agreement to pay within a specific time frame, with clear penalties for late payment. Your agreement should include:
• Billing procedures.
• Payment due dates.
• Early payment discounts.
• Credit terms and limits.
• Accepted payment methods.
• Late fees and penalties for unpaid balances.
• Legal action you’ll take if customers default.
• Steps customers should follow if they have billing questions or disputes.
6. Make it easy for customers to pay on time. Creating timely, detailed invoices that are easy to read is the first step in preventing billing disputes. Support your billing process by sending automatic reminders a few days ahead of the due date, offering to answer questions. Along with standard credit accounts, consider offering other options: Credit cards and payment platforms like Venmo, PayPal and Zelle can help customers maximize cash flow while sticking to their payment agreement.
7. Invest in an advanced billing system that automates billing workflows and provides predictive data. Ask your team to evaluate and recommend systems that will grow with your company and are easy to learn and use. CRM systems make it simple to track all payments and customer interactions, enabling you to spot trends and improve your billing and collections procedures.
8. Set clear procedures for escalating past-due accounts. Time is never on your side in collecting business debt. Have clear protocols for communicating with past-due customers over several channels. The goal is to follow a friendly, yet firm approach, signaling your intent to resolve payment disputes so customers can keep doing business with you. Be prepared to take decisive action in cases of serious default. This may mean referring delinquent clients to a collections agency or attorney for further action.
If you’re still informally handling credit and billing, putting these recommendations into practice might seem like a steep climb. But the next stage of business growth always demands that you manage new risks with new solutions. Centering your credit and billing practices on customer care and quick resolution of disputes will help you convert growing revenues into long-term profits.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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