Legal Line: Keep Business Flowing with Improved Collections Practices

  
     
September 01, 2011

All businesses, small and large, work hard to sell their products and services.  But getting the sale is just the first step in turning a profit and making the business successful.  After making the sale and providing a great product or service, the most important function of the business is the collection of revenue.  It does not matter if the business sets a new record for sales if the business does not collect the amount the customers owe for the products and services.   But what can a business owner or manager do to ensure better collectability of accounts receivable?  The answer depends on your industry and current practices.

The first thing every business should consider is the practices and the documentation utilized for the sale and the billing of the products or services provided.  Ideally, a business should be paid immediately upon completion of the transaction.   However, outside of a business that provides retail sales or certain type of services, this can be difficult to accomplish.  Commonly, the business will simply send an invoice and wait for the customer to pay.  But what happens when the customer does not pay on time?

Businesses need to keep a detailed “aging” of outstanding invoices, and timely and consistently follow up with telephone calls and mailings or demand letters.  This can be a time consuming and costly process for the business owner.   To encourage customers to timely pay invoices, businesses should consider charging late fees and/or interest on the outstanding balances.  However, please be aware that Indiana requires notification to the customers that such fees can be charged and under certain circumstances there are limits to the amount that can be charged.   Businesses should consider having the purchase orders, invoices, estimates and other documentation used in the normal course of operation reviewed by an attorney to ensure that the proper language is incorporated to best provide for the collection of these fees.

Even if the best documentation is used with the proper language some customers just do not pay.  The next collection step for a business is a lawsuit.  When the collection process reaches the filing of a lawsuit, all businesses are advised to consult with an attorney.  The attorney can provide legal advice about the process and an estimation of the cost to pursue the matter.   When businesses hear this, the first thing they say is, “Wait, it’s going to cost me to collect on money owed to me?”  Well, yes and maybe no.  Yes, the attorney is going to charge you for his or her services, but this cost may be eligible to be paid by the customer you are seeking to collect from.   Indiana law provides that the attorney’s fees incurred by the winning party can be required to be paid by the losing party if the appropriate provisions are in writing.  This point is important.  In addition to sales documentation containing interest and fee provisions, as discussed earlier, the documentation must contain the appropriate attorney’s fees and legal cost provisions for the prevailing party to collect the cost of collection.  Without these provisions, Indiana does not allow for the collection of legal cost (except under some specific circumstances).  

Depending on the industry and the type of product or service provided, there may be another powerful tool for collection, such as a “mechanic’s lien”.   Additionally, the use of bank issued letters of credit is common in some industries, along with lines of credit, personal guaranties, and security agreements.   However, the application and use of these devices are beyond the scope of this article. 

The tools and procedures available to a business to assist in collecting accounts receivable is unique to each business and industry.  In addition, there are advantages and disadvantages to the procedures that should be analyzed with regard to your specific business to determine the most appropriate steps to take.   Therefore, you should thoroughly discuss your specific situation with a qualified attorney.


This article was written by Brian E. Townsend, a partner with Rudolph, Fine, Porter & Johnson, LLP in Evansville, Indiana.  For additional information, you may contact him at (812) 422-9444 (e-mail: bet@rfpj.com).  His practice areas include Corporate and Business Law, Banking Law, Real Estate Law, Contract Law, and Mergers and Acquisitions.

This article is intended solely as an information source and its contents should not be construed as legal advice.  Readers should not act upon the information presented without professional counsel.