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EVEN ONE BILL outstanding can make a big difference to a small company's bottom line.

But small companies are less likely to have a collections specialist on staff than larger companies, which typically have their past-due bills spread over numerous accounts.

Here's a look at the steps three small companies took to turn around their lackluster collections:

Cutting Off Late Payers

Company: Slack & Co. Contracting Inc., a 185-employee company that lays pipe and clears earth for construction jobs around its Houston headquarters.

Problem: Customers owed so much money in past-due bills — about half were more than 60 days past due — that Slack borrowed as much as $1 million a month from bankers to pay employees and finance equipment. Some customers had a long history of paying late or only partially after claiming that the company did only part of the work.

Solution: Jim Slack Jr., the company's president, cut off rogue customers, taking his cue from other companies he had read about. About five years ago, Mr. Slack began poring over his payment records and spoke with others in the industry to determine which companies habitually stalled on payments or refused to pay bills in their entirety.

Results: Slack won't do business with 10 of Houston's top-25 commercial-building contractors. Some are companies the firm worked with, but decided to cut off. Others were put on its blacklist based on their reputations.

Mr. Slack no longer has overdue debt. He estimates the company saves close to $25,000 each year because of reduced borrowing. And employees no longer waste time chasing after so many delinquent accounts.

"I would rather sell less and make my margin than sell a whole lot more, lose sleep, get gray hair and have a heart attack over not getting my money," Mr. Slack says.
Cost: He hired a new employee to follow up on invoices before their due dates, making sure clients have no reason not to pay.

Drawback: Some employees questioned whether they should turn their backs on big customers. "People confuse volume with profit," says Mr. Slack. Especially for a smaller company, "to turn your back on business is a scary proposition."

Enlisting the Sales Team

Company: Nicholas & Co., a Salt Lake City food distributor with nearly 500 employees.

Problem: The company strained under the weight of customers' unpaid bills. "A lot of customers were spoiled" by years of lenient credit terms and most took more than a month to pay — longer than the industry average — says Susan Archibeque, director of credit. "We made it too easy for them."

Solution: About five years ago, the company changed its sales-pay structure to base commissions partly on how much of a sales representative's accounts are current and how long customers take to pay. For example, if a bill is more than 45 days overdue, commissions are reduced by 25%. Previously, sales representatives pocketed their commissions before customers paid their bills. The change makes sales representatives more aware of a customer's creditworthiness — and less likely to sell to someone who is unlikely to pay his or her bill.

Ms. Archibeque also helped create a new credit policy with stricter payment standards — such as cash on delivery — for higher-risk customers.

Results: The average number of days it takes customers to pay their bills has fallen by nearly half. Ms. Archibeque estimates that the company has $15 million more in the bank each day because of the faster payments. Plus, she adds, Nicholas saves more than $1 million each year because of reduced borrowing needs.

Cost: The biggest expense was in the time spent in meetings over the course of a year with executives who initially resisted the change. "For the first three months after I got here, I had to stop myself from grabbing my purse and leaving," Ms. Archibeque says. She enlisted the help of finance-department executives to persuade the top brass that the changes would help the company's bottom line.

Drawback: A handful of salespeople — three or four of around 70 — left the company. "When I first started," Ms. Archibeque says, "I had salespeople in my office constantly, saying 'How dare you do this?' " And when she asked customers for payment upfront or on stricter terms, some "hated me," she adds.

Formulating a Formal Policy

Company: KTM Auto Inc., an auto-repair and diagnostics shop in Plymouth, N.H., with six employees.

Problem: When customers asked for a little more time to pay, the company extended credit to them on an ad-hoc basis. "Next thing you know, people owe you money, and you don't know what to do," says Brian Kendrick, the firm's service manager.

Solution: About two years ago, KTM adopted a credit policy outlining borrowing terms along with a more formal collections process. For instance, Mr. Kendrick works with customers to choose a payment due date ahead of time that works for both the shop and the customer. Someone who requests credit is asked to complete a formal application that includes an address, phone numbers, place of employment and personal references.

"Being more proactive about it upfront gives the customer the impression that we're serious," says Mr. Kendrick.

When a bill is overdue, the customer receives a collections letter mailed in a U.S. Postal Service Priority envelope. "It just makes it look that much more formal," he says.
Results: The shop slashed overdue bills to less than $1,000 from about $3,000 before the policies were instituted. And Mr. Kendrick estimates that his new collections practices save him $1,000 in annual bad debt write-offs. "People understand," he says. "When they see you have a policy in place, they're going to take it more seriously."

Cost: About $150 in discounts on car repairs in return for advice from a customer who is a credit counselor. At the counselor's urging, Mr. Kendrick studied a book on collections and crafted his new credit policy. The counselor, Michelle Dunn, executive director of Credit & Collections Association LLC, a consulting firm in Plymouth, N.H., says her consulting packages start at $50 for a half-hour session.

Drawback: "Nobody likes being the bad guy," says Mr. Kendrick. "When I started out, [picking up the phone] was kind of daunting." Mr. Kendrick doesn't believe he has lost business as a result of his more stringent policies.

Write to By Simona Covel at simona.covel@wsj.com