What do you do when an A/R monkey on your back becomes more like an 800-pound gorilla?

Getting the accounts-receivable monkey off your back is your first step toward achieving real profitability in your contracting business.

Through many conversations with my fellow residential service contractors and up-close looks at hundreds of businesses, I've seen dramatic evidence that extending credit to customers is an easy habit to pick up and a very tough one to break.

We've already discussed how to go cold turkey on extending credit to your customers and rapidly reducing your accounts receivable in a few simple steps. However, many of you were undoubtedly quick to note that your big commercial customers can be a different kind of animal. So can large residential accounts. Instead of having an A/R monkey on your back, it can be more like dealing with the proverbial 800-pound gorilla.

After all, you can hardly walk away from some of these big jobs, or a job that brings with it the possibility of many future referrals, such as a big property management company, right? If these customers tell you to send them a bill, you pretty much have to go along, don't you?

The simple answer to both these questions is "no." That line of thinking - that you must extend credit to win the customers - is what gets far too many contractors in trouble. Believe it or not, you're better off finding another customer than taking a job that will tie you down for several days or weeks and then tie you up for several months trying to get paid.

The good news is, what a big commercial customer wants most is not credit, but exceptional service at a fair price. If you can provide that and present a professional image, you can win their business and negotiate your own terms of payment.

Pick & Choose

Start by learning which customers you should refuse to work for. When you get a call for service, before setting the appointment, check your computer to make sure this customer doesn't already owe you money. If they do, instruct your customer service reps to explain politely that you cannot accept a new assignment from this customer until the previous account is closed. In these cases, teach your service rep to ask immediately how this customer would like to close the previous account, by check or by credit card? Once the previous account is settled, explain that for future jobs, you will expect payment upon completion of the work.

By necessity, some commercial accounts must be handled differently than residential service jobs because the person who pays the company's bills often won't be on the site where you perform your work. These are important customers, though, and worth some preparation on your part before you take them on.

First, ask the customer to complete a credit application, providing all the necessary details about company ownership that will allow you to get a reliable credit check.

Next, get a credit report from an approved agency, such as TRW or D&B.

Limit the amount of credit you extend on the first job you do for a commercial customer, either as a percentage of the estimated bill or a flat dollar amount. Extend full credit only for those who have proved worthy through repeated prompt payments.

If you get a large job from a company with an out-of-town headquarters, ask them to express-mail you a check for down payment before you begin work.

Send bills immediately upon completion of the job. Any delay on your part in sending the bill will imply a period of forgiveness on payment. You want to send the opposite message. State clearly on the bill that payment is due in full in 30 days (or less).

More On Residential

Remember, there is virtually never a good business case for extending credit to a homeowner.

For large residential jobs and projects that will take more than one day, collect a down payment before beginning. Also before beginning work on these large jobs, set up a plan under which the homeowner will make payments upon completion of agreed-upon stages of work.

For example, if you expect the job to last four days, get your customer to agree to pay you a quarter of the total at the end of each day, calculating the remainder at the end of the job. That way, you're never stuck for more than one day of labor or for your cost of materials.

If the homeowner is going to be away when you do the work and wants to arrange for a neighbor to let you in, no problem. Just make sure to get a credit card number over the phone and fax the authorization for payment to the customer's workplace. The same principle applies for rental property in which a tenant admits your tech. Get the owner's credit card number before you begin.

If all your efforts to collect on the job have failed, send the customer a bill immediately and follow up with a telephone call. Depending on the dollar amount involved, inform the customer of your practice of filing for a mechanic's lien on unpaid bills.

It's important to move quickly on unpaid bills. After 20 days, turn it over to your attorney or collection agency. Be prepared to write off debts under a given amount. After all, it's no use sending good money after bad.

Finally, remember that you must thoroughly train your techs in the techniques of collecting payment and the absolute importance of collecting on the job. Refresh that training annually or more often if necessary.

If you find that your techs lack commitment to collecting on the job, tell them that you will debit their bonus accounts until you collect the debt. This helps enforce the principle that collecting is an essential part of their duties.