24

The Art of Credit and Collection

All of us, big and small, music, post, or replication, creative audio person or technician, have been “stiffed” more than once. People whom we trusted, those who paid us regularly for years and then stopped or stretched us out until we had to take legal action, are a constant threat to our bottom line—and a fact of business life. How do we minimize this perpetual threat? How liberal or conservative a credit and collection policy does one have to adopt in order to maximize revenue and minimize loss? What are some of the games these people play to take advantage of us? How do we respond in kind?

ADVANCING CLIENT CREDIT

First, there is no question that both client credit authorization and collection of past due invoices are an art. Some people do it very well. They manage to somehow balance the taking of foolish risks with clients who have a poor credit history against securing as much business as possible for the studio. The alternative is an empty room that provides no revenue. Others resign themselves to the 90-120 day payment cycle of major music labels and large visual (film and TV) program providers and demand payment in advance from all others. Dealing with powerful clients means understanding the business philosophy of paying you when they get paid by the distributor or programmer to whom they furnish the audio content that you have provided.

The next question you need to ask is: What is the average age of your receivables in number of days since invoicing, and how many days can you continue to stretch your creditors in order to maintain your own good credit rating? This is called cash flow management. Your banker or credit provider will tell you that average should be 35-45 days, and you should write off a maximum of 1½ percent of sales annually that are not paid, and reserve for that contingency. If you need to be paid in a maximum of 30 days in order to maintain your mandatory accounts payable cycle (payroll, rent, telephone, supplies, and the like), you probably cannot afford, most of the time, to provide services to a client who historically does not pay his studio invoices for an average of 90 days.

Before you pitch that “90-day” client to utilize your facilities, do your homework with your competitors, credit agencies such as TRW and Dun and Bradstreet (D&B), and your friends on the street, to find out their experience with his or her payment history. If the client fits the payment profile that you require to meet your cash flow needs, it is time to pursue that client and do whatever is necessary to get him or her into your facility. Competitors will help you with this information because they welcome the opportunity to check out the payment record of a potential client with you, if that client has worked at your facility in the past. It is a mutually beneficial exchange of information that aids the survival odds for both of you. Network with your competition to share credit information. It works.

Purchase orders are a fact of life. One of the first red lights a potential client may give you is the inability to provide you with an acceptable purchase order that you believe will be paid, which says the client agrees with your rates to be charged and your terms of payment. If your client is a production company, see if the major provider who is their client will give you a purchase order guarantee. If not, then the recommended terms are cash up front or no session. In any case, it is important to give the client a “deal letter” that describes the time booked with you, the rate you will charge, your charges for supplies and overtime, your payment terms, and your tape or material release policy. Get the client to sign a copy of your one-page confirmation letter, approving your terms, including the agreement to pay any collection fees, which you can show the client later if there is any misunderstanding regarding your company's policies. If clients don't believe they have to pay you, they won't. Remember that.

GETTING TOUGH WITH COLLECTION

First, make sure your documentation (client-signed work order, invoice for each session, and so forth) is complete and accurate. Next, question your tape and/or material release policy. The only clients I ever gave master tapes to before payment were my major clients—those who always paid on time. If you release the masters, you have zero leverage. If the client must have the masters to make a deadline, then request a check for all moneys due, or a partial check and a promise in the form of a demand note stating when the remainder will be paid. If the client can't do that, then you have reached the moment of truth. Do you trust him or her for the money owed? The wrong decision could ruin you, either by taking away your positive cash flow, if you are too lenient, or by losing you major clients, if you are too tough.

If your client does not keep his or her promise to pay, you find yourself involved in the art of collection. Always send monthly statements with an aging of the moneys owed to you by the client, separated into 30-60-90 days and beyond. Send these every 15 days, if necessary, because it brings your problem to the client's attention, confirms the basis for the debt for possible future legal action, and gives you an excuse to telephone him or her for collection at least twice a month.

Will the client take your call and talk to you about why he or she is late? Is there a good excuse? Is the client willing to make a partial payment now and commit to a guaranteed date for the payment of the remainder? Does the client keep commitments and pay you at the time agreed to? What do your friends on the street say about this client's current fiscal condition? Has he or she suffered a loss of some kind, such as a major client leaving? Is he or she working on the same project at another studio in your geographical area? If so, he or she may have secretly made copies of the masters and doesn't need the masters you are holding for collateral. If that is the case, immediately confront the client regarding this “theft” of your property and advise the facility where he or she is now working of the need to work together to be sure you both get paid.

The final step is legal action. First, send a 10-day “demand for payment” letter, or have your lawyer do it. This is, many times, legally required prior to filing suit for payment. If you have to sue, minimize your costs by learning the Small Claims Court limits in your jurisdiction. In California, for example, I can go to the court and for about $50 sue for nonpayment up to $5,000—and no lawyers are allowed. It is just You vs. the Debtor and, if your documentation is accurate and complete, a judgment in your favor is usually the outcome.

A lawyer's letter or Small Claims Filing, in most cases, is all the motivation the client needs to pay you. Why? Because of his or her credit rating. If you get a judgment against the client, his or her credit rating with the major credit rating providers such as D&B will be ruined and provide a flashing red light to all potential creditors not to advance this person or company any credit. If the client is operating on other people's money (OPM) to run the business, he or she will do almost anything to keep this from happening. Although “blacklists” (bad credit risks by name) are illegal in most states, there is nothing to stop you from calling your friendly competitors to advise them that you have not been paid. This kind of cooperation, done verbally, can save both of you money, and many times one of you can help the other to collect what is due.

Set your terms (net 10-30 days, for example). Release the finished product before being paid only as a last resort (and strongly request a written agreement in which they agree to pay attorney's fees if there is ever a need for legal action). Constantly balancing your willingness to advance credit with your ability to collect for services performed is an ugly necessity of staying fiscally alive. If you learn to do it well, you will grow and prosper. If not, your days are numbered. It's called survival in the professional audio jungle.