A consulting firm doing about $1.8M in revenue had $340,000 sitting in accounts receivable. Average days to collect was 78. They had hit payroll on a personal line of credit twice that year. The owner kept telling me he had a sales problem.
He did not have a sales problem. He had a collections problem dressed up as a cash problem.
Most service businesses do not fail because revenue stops. They fail because revenue gets paid 60, 90, sometimes 120 days after the work is done. The P&L looks fine. The bank account does not.
Collections is one of the few areas in a small business where the work to fix it is mostly free. No new clients. No new ads. No headcount. Just better terms, a real cadence, and a few proactive moves up front so you never end up in this position again.
Here are seven strategies that actually work, ordered roughly from easiest to hardest to put in place.
1 Offer an Early Payment Discount
This is the simplest one, and most owners are surprised at how well it works. The math is straightforward. If your terms are net 30, offer a 2 percent discount for payment within 10 days. Sometimes written as "2/10 net 30."
You are paying roughly 2 percent for 20 days of cash. Annualized, that is expensive money. But if the alternative is a line of credit at 10 percent and the stress of waiting another month to pay your team, 2 percent is cheap. And in my experience about a third of clients will take the discount, especially if they have their own cash and want the deduction.
2 Put a Payment Plan in Place Before the Account Ages
When an invoice is 45 days late, most owners send another reminder. The reminder gets ignored. The invoice ages to 60 days. Then 90. Now you are calling collections lawyers, or you are about to write it off.
The move you should have made at day 30 was to call the client and offer a payment plan. Three or four equal installments over the next 60 to 90 days, with a defined start date and amounts. Get it in writing.
The client almost always agrees. Why? Because they are not refusing to pay you. They are juggling. A clean plan lets them stop juggling. And once they are on a plan, the payments come in like clockwork in most cases.
- The total owed, broken into 3 or 4 specific installments
- Specific dates for each payment, not vague language like "monthly"
- A pre-authorized debit or scheduled card charge if you can get it
- A clause that says the full balance is due if a payment is missed
- Signed acknowledgment, even a simple emailed confirmation
3 Settle the Debt: Cash Today vs. Cash Maybe
For accounts over 90 days where the client is clearly struggling, sometimes the right move is to accept less and close it.
I have settled accounts at 70 to 85 cents on the dollar for clients who could pay something now but not the full amount. The math is the same as the early payment discount, just at a different point in the cycle. You are trading certainty today for uncertainty tomorrow.
This is also the moment to be honest about what the receivable is actually worth. A 120-day receivable from a struggling client is not worth a dollar on the dollar in your books. It is worth roughly what you can actually collect. Cleaning up bad AR makes your books trustworthy and frees you up to focus on the clients who do pay.
4 Debt-for-Equity Settlement (For the Right Situation)
This one is niche, but worth knowing about. When a client is a public or scaling private company that genuinely cannot pay cash, you can sometimes negotiate to settle the receivable in exchange for shares.
Done correctly, this turns a stale receivable into an asset you might later realize at a premium. Done carelessly, it ties up your collection in a security you cannot easily sell. So a few rules of thumb:
- Public companies only, ideally. A debt-for-shares deal with a private company means you are holding paper you cannot move.
- Negotiate a discount to the share price. If the stock is trading at $4, get your shares at $3.20. You took the risk, you should be compensated for it.
- Check the lockup period. Many of these deals come with restrictions on when you can sell. Know what you are signing into.
- Get your accountant or tax advisor involved before you sign. The tax treatment of a debt-for-equity swap is not always intuitive.
Used once or twice over the life of a business, this can turn a write-off into a real win. Used as a default solution, it just shifts the problem and ties up your balance sheet.
5 Tighten Your Collections Cadence Before You Tighten Anything Else
Most small businesses do not actually have a collections cadence. They have a bookkeeper who sends a reminder when they remember to. Putting a real cadence in place is usually the single biggest move you can make. It costs nothing, and it works.
Here is a cadence I have used across professional services, agencies, and managed IT clients with good results.
Invoice goes out the day work is delivered
Not month-end. Not whenever the bookkeeper gets to it. Same day. Include due date, payment methods, and the early-payment discount line if you offer one.
Friendly receipt-confirmation email
Short, automated. Confirms the invoice was received and the due date. Catches anything that got lost in AP early.
Reminder before due date
"Just a heads-up, this invoice is due on the 30th." Soft, automated. Removes the "I forgot" excuse entirely.
First overdue notice
Polite, but specific. References the invoice number, amount, and how to pay. Sent from the bookkeeper or AR contact.
Owner or partner picks up the phone
This is the step most service businesses skip. A 60-second phone call from the owner or lead partner moves more invoices than ten emails. People pay people they have a relationship with.
Payment plan offered in writing
This is the moment from Strategy 2. Do not wait until day 90 to offer it.
Settlement, escalation, or write-off
By this point, the path is clear: settle the account, hand it off, or take it out of AR. Stop letting it sit there pretending to be money.
I built a version of this cadence for a legal practice that had a collections problem. The lawyers were not following up with clients because it felt awkward to chase legal fees. We gave them the calendar, the templates, and a rule: at day 45, the lead partner makes the call. Their days outstanding dropped from about 70 to 42 in a quarter. Nothing else changed.
6 The Proactive Moves: Don't Get Into This Position in the First Place
The best collections strategy is not collecting at all. It is structuring your engagements so the cash comes in before, or alongside, the work. Most service businesses can shift to some version of this without losing clients. The owners who resist usually find out the hard way that "industry standard" net 30 is not actually mandatory.
Take a retainer up front
Standard in law and accounting. Increasingly common in agencies and consulting. One to three months of fees in trust before work starts.
Bill on the 1st, not at month-end
For monthly engagements, charge in advance for the upcoming month, not in arrears for the past one. This single change moves your AR by 30 days.
Auto-debit or auto-charge
For recurring monthly clients, set up pre-authorized debit or card-on-file. Removes the choice to be late entirely.
Milestone billing on projects
30 percent on signing, 40 percent at midpoint, 30 percent at delivery. Never deliver the final asset before the final invoice is paid.
Deposit on first engagement
New client, no payment history with you? Take a deposit. The clients who push back are usually the ones who would have paid you late anyway.
Stop work clauses in your contract
If the client is past 30 days overdue, work pauses until the account is current. Put it in writing before you start, not after they owe you.
7 Watch the Aging Report Weekly, Not Quarterly
The single most useful financial report a service business owner can look at every week is the AR aging. Not the P&L. Not the cash flow statement. The aging.
It tells you, in one glance, where the cash is sitting, how old it is, and which accounts are starting to drift. Most issues are visible at 30 days, manageable at 45, and a real problem at 60-plus. If you only look at this report at quarter-end, you are catching problems three months after they started.
Down from 78. No new tactics other than these. Same clients. Same revenue. Just a real cadence, retainers on new engagements, and a weekly review of the aging.
The Common Thread
Notice what runs through all seven of these. None of them require selling more. None of them require cutting costs. They are not strategies for growth. They are strategies for converting work you have already done into cash you can actually use.
Most service businesses I work with are sitting on enough receivables to fix their cash problem entirely. The money is not missing. It is just sitting in someone else's account longer than it should be.
The owners who solve this stop thinking about collections as an awkward thing to chase, and start thinking about it as a system that runs in the background. Once it does, cash stops being the thing that wakes you up at 3am.
A Quick Check for Where You Are
Three questions to ask yourself today:
- What is my average days to collect right now? If you cannot answer that quickly, that is the first thing to fix.
- How many of my recurring clients are on pre-authorized debit or card-on-file? Anything below 80 percent leaves money on the table every month.
- How much of my AR is over 60 days, and what is my actual plan for each of those accounts?
If the answers are vague, your collections process is not a process. It is a hope. And hope is not a great way to make payroll.
