If there is one thing that strangles business cash flow it is well overdue debts. No one likes to deal with problem debtors but with a few basic strategies and prioritising the collection activity, you can increase your cash collections and keep your accounts receivable under control. These tips are for any unpaid debt that is not in dispute. There are many ways you could approach this but when your customer has lots of people chasing them for money using these tips can help you get to the top of the pile for payment.
Being mentally prepared for the task of collecting overdue debts and setting time aside to do it regularly will make a big difference to your collection success. Preparing for optimal debt collection requires a few basic tasks – setting expectations for payment, establishing a business plan and systematically working through the entire debtor list will bring the best results. Check through any notes made from previous collection activity so you are prepared for the stalling tactics that often get used – such as “I didn’t get the invoice”.
Shouting at a customer and demanding payment is unlikely to get you anywhere – and harassing customers to collect a debt is illegal as it violates the Fair Debt Collection Practices Act. Instead, use a professional manner and engage in a conversation that establishes facts; this will differentiate you from other debt collectors. There are lots of reasons why a debt may be outstanding and in most cases the customer has every intention of paying but their cash flow just doesn’t allow them to at that time. You want to maintain this goodwill throughout the process.
The collection call should engage the customer and establish these 4 things;
1. agreement to how much the customer owe,
2. that previous collection requests have not seen the debt paid,
3. what is expected from the customer now, and
4. the likely consequence of not honouring a promise to pay.
Be open to accepting an arrangement for small regular payment rather than insisting on payment of the entire amount that is owed. Collecting the debt through regular small payments over the course of a longer time period is far better than not being paid at all. This also allows the person making the payment to feel more in control of their finances.
This step is key. Manage the conversation to ensure you get your customer to commit to a specific course of action i.e. payment of a specific amount by a specific date. Once you have this, send them an email to confirm that is what you are expecting and remind them that if the promise is not kept what the next step will be. If that is referral to a formal collection agency to collect the overdue debts, make sure you intend to follow through on that action. It may also help to remind the customer that referral may result in legal action which could have an adverse effect on their credit rating.
Diarise when the customer payment is expected and check to make sure it was made as promised. If it was, always send the customer a thank you for their payment. This maintains a good relationship and gives you the option to do business again – should you want to. If the promised payment is not received, then inform the customer that you have not received the payment as promised and that the debt has progressed to the next step. Not following through on this stage weakens your credibility in the eyes of the customer. And just makes it harder to collect the money you are owed.
Avoiding the Need
The best way to control your cash flow is to avoid overdue debts in the first place. This article Need More Cash In Your Business? has lots of great advice on putting in a best practice credit control in your business.
If you need help to develop a credit control policy for your business a proCFO virtual CFO in Perth may be just what you need. They will bring experience from a wide range of businesses and industries and help you create a system that will work well in your business. If you want to learn more about how we help, simply contact us for more information.
About David Officen
David is the Founder and Managing Director of proCFO. David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.