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Tuesday, June 21, 2011

Timely AR collections critical to operational success

 Here's a good "learn from my experience" guest blog from the president of Farmington Hills-based ZenaComp.

By Mark Lichtman,
President of ZenaComp of Farmington Hills
President of EO Detroit

You meet with a prospective client, present your proposal and the client says “let’s get started!” You’re excited, want to meet their tight deadline and immediately get to work on the new project.  You will invoice them at the end of the month and expect them to pay in 30 days.  Isn’t this how all business is done?
I learned at ZenaComp, my technology services company, that the above scenario may work most of the time but I got stuck with slow-paying and non-paying clients more than I would have liked.  I came to understand that when I gave my clients “net 30” terms, the credit I was extending to them in the form of the salary I pay my employees, the equipment and software I purchased on their behalf was actually like an unsecured loan from the bank. Some of my clients were credit worthy and some of them were not.
Requiring pre-payment of third-party hardware and software is one key strategy that we now use with both new and existing clients.  We instituted this policy after we had sold a client a new computer server, installed and configured it and then the client did not pay as agreed.  We had paid our vendor and our employees thousands of dollars and had trouble collecting payment from our client.  Luckily a face-to-face meeting with the client resulted in full payment of the account.  However, we had learned a valuable lesson and then made the policy that all hardware and software had to be pre-paid.  We were concerned that our clients would balk at this new policy.  With over 200 clients, we have had just a handful of client complaints to-date.
Collecting a project deposit is another of our key credit/payment strategies.  We collect from 25% to 50% of the project price in advance which serves many important functions.  Most importantly, it ensures that the project is “real.” There have been a few instances in the past where we started work on a project and our client contact did not actually have the authority to authorize our work.  Waiting to receive the deposit before starting work also puts pressure on the client to make a definitive decision to proceed and to make sure your company is set up in their accounting system for payment.  
Although “net 30” terms or even longer payment terms are customary in today’s business environment, each client has to be reviewed (credit references, payment history with your company, Dun & Bradstreet searches, etc) in terms of their risk of slow or non-payment if you provide them credit.  There really are no set rules for providing credit and you can require clients to pre-pay all or part of the services or products you provide.  After all, we should be compensated fully and on a timely basis.

For more information, contact Mark Lichtman at

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