Two Tips on Using Your Sales Contract to Keep Down Your Account Receivable Ratio
For Immediate Release
| Posted Nov 21, 2010
Cash is king, as the old adage goes. In this tight economic climate, cash flow is the absolute most important short-term factor in business survival. Most businesses have excellent products or services yet struggle when their customers do not or will not pay on-time.
A few changes in your standard sales contract can put your company in a stronger business position when attempting to collect on the uncollectible.
Add a Provision to Impose Past Due Finance Charges
First, add a reasonable interest rate for balances past due. While requiring a Mafia-styled loan rate will likely be unreasonable in the eyes of the court, a single digit compounding rate on outstanding balances will cause the accounts payable professional to put your invoice higher in the order of payment. Each day you are not paid is another day you are carrying their business, and not building yours.
Many businesses have not included such a provision, which has resulted in some savvy-but-cash-strapped customers to look for these essentially “interest-free loans.” Not paying the bill helps aid in their cash flow problems while still being able to access the goods and services they desire. See Kermit Pattison, Fire Your Relatives. Scare Your Employees. And Stop Whining
, N.Y. Times (Feb. 10, 2010).
Add an Attorney’s Fees and Costs Provision
Second, have your sales contract require that if forced to collect on their indebtedness, the buyer must pay all reasonable fees for collection including processing, court, and legal costs as well as reasonable attorney's fees.
Your company is taking a risk in providing goods or services on credit. As such, your company is entitled to demand certain promises from your buyer in consideration of the generosity of your financing. Providing such credit often times consists of substantial outstanding amounts but not enough to be able to legally enforce a contract due to the cost of hiring an attorney. Put this obligation on the past-due buyer’s shoulders. Many times the threat of litigation, coupled with the high risk that the buyer will have to pay his as well as your attorney’s fees, is enough to cause immediate tendering of amounts due.
Philip L. Ellison, MBA, JD, Esq is an attorney, business counselor, and civil litigator with Michigan-based Outside Legal Counsel PLC. He has extensive experience in law, business management, corporate operations as well as internal and external communications. Visit his online profile at www.olcplc.com