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10 steps to maximize collection of accounts receivable

Female AccountantBy Jon-David Giacomelli
There are many different revenue models for franchised businesses. In some cases, you will need to actively collect accounts receivable, i.e. money owed for goods or services previously delivered. The following 10 steps are intended to assist these franchisees in ensuring their accounts are paid.

Act quickly
Creditors’ rights lawyers and collection professionals agree on the importance of acting quickly to legally collect receivables. Haste may be the most direct and effective measure a franchise can implement to increase the success of its accounts receivable collections.

The old adage, “the squeaky wheel gets the grease,” has significant truth to it. Debtors prioritize and the most persistent and progressively insistent creditors tend to get paid first. Flexibility is sometimes appreciated, but can also be taken as a sign of weakness. The general rule is: Act first and get paid.

Implement and follow a collections protocol
Your business must have a clear, written protocol in place for collecting overdue accounts. Your franchisor might have such a protocol, particularly to deal with restrictions on using collection agencies. In general, however, few franchisors are likely to have established this level of control over their franchisees’ collection activities.

Typically, the protocol will include one to three overdue collection letters demanding payment or suitable arrangements. The consequence of failure to meet the terms of these progressively aggressive demand letters—and/or any payment arrangements following them—should involve immediate and decisive action commensurate with the terms set out in the letters.

If suitable payment arrangements cannot be achieved by one to three pointed letters, then the account should be referred immediately to legal counsel. A lawyer’s letter is often all that is required to elicit payment. It should (a) clearly state the day upon which legal proceedings will be formally commenced and (b) set out the cost consequences to the debtor in the event such proceedings must be commenced. There is usually little or marginal benefit to your lawyer sending more than one demand letter.

One of the keys to the success of any protocol for commercial collections is to follow threats with action. While there needs to be some flexibility, it should be exercised judiciously and sparingly. Flexibility need not mean weakness.

If, for example, patience is granted over a period due to the debtor’s short-term cash-flow problems, this period should be made clear and agreed upon. Also, the ‘new’ consequences of a failure to make payment as promised must be made clear.

Have a lawyer review your contract documents
An important, yet often inexplicably ignored, method of increasing your franchise’s chances of successful collection is to ensure the written contract terms are favourable to your company.

A great deal of business is transacted with faulty, pro forma contracts and invoices, the terms of which do not adequately protect the interests of the suppliers of materials, services and products. The standardization of your business’ contracts and invoices will have a significant effect on its commercial collections success.

Contract documents should be reviewed and/or drafted by knowledgeable legal counsel and/or your franchisor. Often, the basic contract documents are part of the franchise package, having been drafted and qualified by the franchisor and/or its counsel. They should include clear terms governing payment due dates, interest rates on overdue accounts and your company’s contractual right to substantial indemnification costs, in the event commercial collection proceedings are necessitated.

A strong, properly worded contract can save thousands of dollars in litigation costs. Defaulting creditors will often pay after being told by their lawyers their contract does not favour them.

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