Once upon a time (and not that long ago), it took many years to build a business from scratch. First you had to set up shop, invest a little money in advertising, build a client base, and eventually word of mouth would either make or break your business. How dramatically things have changed now that we have entered the 21st century.
Thanks to the Internet and brilliant marketing strategies, the entrepreneur starting out today could find him or herself running a multimillion-dollar company in a matter of months. Many entrepreneurs underestimate the power of marketing and the vehicles available to them to get the word out and do not anticipate their sales going from thousands of dollars to millions of dollars in so short a time.
Their simple idea becomes a full-blown production and before they know it, all their time is spent figuring out how to keep up with demand, how to mass-produce their product, and how to get it to their customers as fast as they can.
Many did not think ahead and buy computer programs that could accommodate a massive amount of billing in a short period of time. As a result, billing and collections fall by the wayside. First things first, or so they think. The mentality of "we have to get the product out and will worry about the billing later" will no doubt come to haunt them.
What they are forgetting is that sales without payments can lead to a Chapter 7 bankruptcy filing faster than it took them to build their overnight business. That is why it is so important to prepare for success when you go into business today; and success is measured in collections as much as it is in sales.Timely collections
An essential component for a business to have in place before opening its doors is a timely billing/collection system. People have short memories and the longer you wait to send out your bill, the harder it will be to collect. Once they have used your service, paying no longer becomes a priority for them until they need your service again. A timely billing and collection system will eliminate future problems and help to weed out the good customer from the bad customer.
There is no question that the older your receivable, the harder it is to collect and the more you put yourself in the position where you have to negotiate the debt in order to get paid. People starting out in business today tend to give more credit than they should to new customers and extend payment terms longer than they should in order to keep the customer.
However, extending the terms of your agreement at the onset sets precedent for what you can expect from your customer in the future. First you extend your payment terms from 30 days to 45 days; then 45 days becomes 60 days, and before you know it, the customer is on a long-term payment plan. It is very important when you are starting out in business to stay on top of your receivables from the moment the bill is out the door. If a payment is due on the 30th of the month and you do not receive it, then you should be on the phone the day it becomes due to find out if there is a problem.
Eliminate the past-due reminder letter to new customers. Calling them creates a greater sense of urgency than written correspondence. Besides, past-due letters are usually ignored and you will find yourself on the phone two weeks later with the customer anyway.
When you start offering discounts to customers as an incentive to pay longstanding or large invoices, that is the moment you have trained your customers to hang on to your invoices for as long as they can. They now know that the greater their debt to you becomes, the more likely they will get a discount from you in order to get paid. It is better to train your customers to pay you on time right from the onset.Use an attorney
Another essential component for a business to have in place before opening its doors is an engagement letter or service agreement prepared by an attorney. Although how-to books are available on just about any topic imaginable, investing in a "how to write my own service agreement" book is not recommended.
Some books discuss the service agreement at length; however, they usually do not include a sample agreement on the chance that people might copy it and think they could use it for their businesses. Rules and regulations vary from state to state and from business to business. People in the medical field have an entirely different set of regulations from which they must abide as compared to, for example, a computer consulting firm.
Only an attorney can be familiar with all the rules, regulations and laws that pertain to your particular business, and only an attorney can know what should or should not be included in your service agreement. Hiring an attorney to prepare your engagement letter is a wise investment that will pay for itself many times over.
Taking preventative measures before opening the doors of your business will save you time, money and needless headaches in the long run.
Carol S. Frischer is a member of Holthouse, Carlin & Van Trigt in Los Angeles. Her e-mail address is email@example.com.
Entrepreneur's Notebook is a regular column contributed by EC2, the Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.
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