7 Cash Flow Mistakes Entrepreneurs Make

Too often, small businesses end up in a cash flow crunch because in management’s haste to grow revenues, they often forget to screen out potentially bad customers. Michelle Dunn, founder and president of Never Dunn Publishing, LLC, has over 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,” she details some of the most common financial mistakes (and their solutions) entrepreneurs make.

“I tell every business owner, once a year you need to go through your accounts receivable and fire three to five of your customers–the people you’re spending a lot of time on the phone with listening to them explain to you 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. BE 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 have someone fill out a credit application and the person might just put their name, address, and then just sign the bottom and they don’t fill in the reference portion they don’t put in their work information,” says Dunn. The danger there is that if their account becomes delinquent and the client has moved, the small business has no way of contacting that customer.

Mistake #2: Not checking credit or references. Dunn says many small businesses think they can’t check references because they lack the capability to pull a credit report. “What they can do is just print out or buy credit applications and you can get them at any office supply store or you can just go online and get free credit applications and credit applications don’t have to be scary and long. “A credit application is very basic, it just asks people to fill in their name, address, phone number, and their work information, phone number, address and then if they have an e-mail or cell phone or anything like that.” The report then asks for references — bank reference, a vendor reference, and a personal reference. Then it’s just a matter of calling those references.

Mistake #3: Ignoring accounts as they become more and more delinquent — hoping the person will pay. “I used to tell people, you know we give people a little bit of a grace period five to eight days, but in this economy for the last three years, I’ve been telling people; maybe you want to call eight to five days before the bill is due,” recommends Dunn. She recommends calling the client to verify they received the invoice and asking if there were there any problems with the order. “If they’re a couple of weeks past due, the first thing to do, if you can if there is someone that is local to you is to pay them a personal visit. That works very well.”

Mistake #4: Not placing accounts with a collection agency soon enough. If your customer is ignoring your calls and letters, it may be time to use a collection agency. “And, you need to

move on to what you’re in business to do, what you’re good at, which is not doing the bill collections,” she says. “Tell the customer we’re going to place your account with a third-party collection agency and then, do that. You can’t say you’re going to do something like that and then not do it.”

Mistake #5: Not having documentation to support or 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, what department ordered it. It might even include the actual person’s name who ordered it, what was ordered. You can also get proof of delivery from whomever you’re using as a shipper.

Mistake #6: Shipping more products or performing more services when an account is already past due. “That’s another one of the biggest mistakes that business owners make with an account is they will ship more products or perform more service when an account is

already past due,” she says. “If a customer needs to place another order it helps you to get paid because now you can let them know you already owe me this money and their account is on hold until this is paid in full.”

Mistake #7 Being too lenient with credit 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 habits for family or friends. “So if you complete a sale to say your brother, sister or your son’s little league coach or teacher, or somebody that you know locally you have to have them fill out the same paper work as everyone else,” she says. To gain a little goodwill, the business owner may consider offering the friend or family member a little more time to pay or a better discount than the public would receive. “You would make that clear to them so they know they’re getting a little bit of special treatment.”