7 Ways to Avoid a Cash Flow Crunch

Too often, small businesses end up in a cash flow crunch because the need to screen out potentially deadbeat customers gets forgotten in management’s haste to grow revenues. Michelle Dunn, founder and president of Never Dunn Publishing L.L.C., has more than 20 years’ experience in credit and debt collection. In her new book, The Guide to Getting Paid: Weed out Bad Paying Customers, Collect on Past Due Balances, and Avoid Bad Debt (Wiley; $24.95), she details some of the most common financial mistakes.

“I tell every business owner, ‘You need to go through your accounts receivable once a year and fire three to five of your customers–the people you’re spending a lot of time with on the phone listening to them explain why they have to pay late or why you should still ship their order even though they can’t send you any money,” she says. Black Enterprise spoke with Dunn to learn more of those mistakes and how entrepreneurs can avoid them.

Mistake #1: Getting incomplete credit information at the time of the sale “Some people will take a credit application and just put down their name and address and sign the bottom but not fill in the reference portion, or omit their work information,” says Dunn. If their account becomes delinquent and the client relocates, the small business owner has no way of contacting that customer.

Mistake #2: Not checking credit or references Dunn says many small business owners think they can’t check references because they can’t pull a credit report. “What they can do is print out or buy credit applications at any office supply store, or go online and get free

credit applications. Credit applications don’t have to be scary and long. They’re very basic. The report then asks for references–a bank reference, a vendor reference, and a personal reference. Then, as long as the form is signed, it’s just a matter of the small business owner calling those references.

Mistake #3: Ignoring accounts as they become more and more delinquent, hoping the person will pay In this economy, for the last three years, I’ve been telling people that they may want to call eight to five days before the bill is due,” says Dunn. She recommends calling the client to verify that they received the invoice and asking if there are any problems with the order. “If they’re a couple of weeks past due, the first thing to do is see if you know someone locally who can pay them a personal visit. That works very well.”

Mistake #4: Not placing accounts with a collection agency soon enough If a customer is ignoring your calls and letters, it may be time to use a collection agency. “You need to do what you’re in business to do–not bill collections,” she says. “Tell the customer you’re going to place the account with a third-party collection agency, and then do it.

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Mistake #5: Not having documentation as proof of the debt when someone doesn’t pay This could be a bill of sale, a purchase order, or proof of shipment. A lot of companies will submit a purchase order, which will show the date, the purchase order number, and the department that ordered it. It might even include the name of the person who ordered it and what was ordered.

Mistake #6: Shipping more products or performing more services when an account is already past due “If a customer who already owes you needs to place another order, it helps you to get paid because now you can let them know that their account is on hold until it’s paid in full.”

Mistake #7: Being lenient when the customer is a friend or family member While this is a common issue that often has to be handled delicately, Dunn suggests not changing business practices for family or friends. Have them fill out the same paperwork as everyone else,” she says. For the sake of goodwill, the owner may consider offering more time to pay or a deeper discount. “You would make that clear to them so they know they’re getting special treatment.”