Wouldn’t it be great if all your customers paid promptly, in full, and never had to be reminded, chased up or sent stern letters to collect your cash for business?
Unfortunately, short of some basic changes in human nature, your customers will never queue up to pay you on time. We need to find ways to help them meet their financial obligations to us.
It’s important to adopt a methodical approach to collecting your debts. If we’re both consistent and persistent we’ll not only encourage customers to pay earlier, but we’ll do so with minimal unpleasantness.
The impact of not managing your debtors.
Now, before we look at ideas to improve the collection of debtors let’s think about how payment time affects your business. Let’s not forget that outstanding invoices represent money that is actually OURS! What would it mean to your business if you had that money on hand and you could use it for other purposes – such as investing in your business or paying the next instalment on that machine you just purchased, or you use it to obtain a greater discount on your purchases because you pay the account within so many days?
Money outstanding is your money that you could use for greater profit. Carrying too much in the way of debtors can cripple your cash flow and ultimately could cost you your business. It is absolutely essential to manage it effectively.
Prevent problems – Follow these rules.
Develop a credit policy – Firstly, make sure that your customers clearly understand your payment terms when you make a sale. If appropriate, put them in writing.
Credit type and terms – Ensure your customers understand the types of payment you’ll accept – cash, credit card, cheque or ‘on account’. Also, have in place rules for checking on the credit of the customer – and do the credit check on every new account.
Issue invoices promptly – What message are you sending if you don’t invoice promptly? That you don’t need the money! Don’t show ‘payable within 14 days of invoice.’ Instead, you should show payable by a fixed date, such as 14 June. This leaves the customer in absolutely no doubt about when you expect payment.
Create a collection process – if an account is overdue there should be a process in place to ensure collection activity is commenced as soon as possible. You should take action on the account immediately it has gone overdue. Start with a polite reminder note escalating to a phone call or a visit if the account is not settled. Be polite, professional and persistent whenever making contact with your debtor. While you need to be firm you don’t want to be seen as harassing people. You may also want to leave yourself with the option of continuing to do business with them.
Develop a collection schedule.
You should have a documented procedure that follows a specific timing. It could look something like this:
- Send a reminder notice within one week of the invoice going past the due date.
- At no later than 10 days after the reminder notice, follow up with a phone call.
- Two weeks after the phone call make a personal visit to the customer.
- Two weeks after the visit send a final demand letter.
Find the right tone.
In all these actions ensure you keep the correct tone. On the one hand, you want to collect the debt and on the other, you may wish to continue to do business with the customer. Remember, however, you want to convey the fact that the overdue payment is a serious concern.
You can make a real difference to the amount of time it takes customers to pay you. If you adopt the right set of tactics you can make a big difference to the amount of cash your business has on hand. The key to it is having a plan and consistently working it!
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.