Why is it important

Cash is the lifeblood of every business and without it a business will die.
The importance of a strong debtor collection system cannot be overstated as it provides the business with much needed cash. A systemised method is the best approach. It also means staff do not get distracted away from their areas of responsibility onto other matters such as resending invoices, or chasing up debtor queries.

What to do

The starting point for debt recovery is the Debt Collection Policy for the business.
The key elements of an effective Debt Collection Policy include as a minimum:

• assessment of client before commence dealings
• days outstanding before seek payment
• number of steps prior to legal action

Credit worthiness

Each new client should always be assessed for their credit worthiness before any work is undertaken for them.  This works best when a formal assessment is undertaken, such as with a credit application, however, this may not always be possible, such as for some service businesses. However, it is important to undertake some form of assessment before you commence work.

Terms of trade

The business must decide on its terms. How many days are you prepared to wait for your accounts to be paid? Common terms are 7 days, 14 or 30 days, however, these vary depending on your industry, and commonly accepted norms.

Outside terms

The business must also decide what its policy will be for those clients who exceed the terms.  Will you continue to trade with them?  Will you put them on stop credit?  Will you initiate legal action or debt collection agencies as a matter of course? Every time?

Differential treatment of debts

The business should also decide if there are differential levels of treatment for different levels of debt.  Will a small debtor be treated the same as large debtor?

Procedures Manual - debt collect policy

Whatever the decisions are, they need to be noted in a Policy and Procedures Manual and followed on every occasion. The person responsible for debt collection should also be given full power and support from management for this process to be effective.
Often the debt collection process breaks down when management interferes and overrides decisions, for instance where certain clients have been put on stop credit. The policy needs to be set and agreed by all those involved in the business, then everyone is clear on the ground rules and the business expectations.

Get it right from the start

Debt Collection Agencies have identified the single most common reason for difficulty in collecting debts is that Terms of Trade were not clearly explained up front.  The reason for this is that many businesses owners are concerned that discussing terms and conditions with potential customers up front that will somehow damage the relationship.  In fact, in many cases it strengthens it!

Discussing your terms and conditions makes it clear to all parties what the expectations are and how the account is to be managed. In business to business transactions, the customer is already fully aware of their obligation and legal requirement to pay.  In tougher times however, they will often 'push the envelope' and see how much they can get away with. Don’t play that game!  Be clear with your expectations up front.

If you lose a client because of this then they are not the sort of client you want anyway.  Better to lose them early, than go through the grief, time and stress of trying to collect a bad debt later.

Credit applications

Credit applications are an important tool to filter out credit risks.  Not only do you gain valuable information about your customer, they also allow you to state clearly your terms and conditions. It is now considered regular practice to perform credit checks on new customers. Ask applicants for referral contacts you can call to check on their credit performance before undertaking any work.

Internal procedures - credit bureaus

Establish internal procedures for dealing with debtor collection within your business.  This is a fairly specialised area, and those who have done it know it’s not for the faint hearted.  It’s important that all team members in the business are aware of the terms of trade for the business and what the consequences are for non-compliance. It is also important to regularly review your credit policy to ensure it stays relevant and up to date.

Understand why customers don't pay

It’s important to understand the reasons why customers don’t pay. Broadly these reasons can be summarised as follows:

• they have a genuine dispute
• they are careless
• they are disorganised
• they have no money
• they are unconcerned and can’t be bothered
• they are dishonest

Customer has a genuine dispute

The best approach here is to start follow up early. A reminder letter will tend to flush the issues out and it is far easier to resolve a complaint while the matter is still fresh. Waiting ninety days to find out about a problem significantly reduces your chances of a successful resolution and payment in full.

Customer is careless

The client forgot to pay the invoice, or simply didn’t understand when they were supposed to pay. This may be because you weren’t particularly clear on your terms and conditions. Again, the best approach is to start early and make it easy for your clients to pay.

A reminder letter is a gentle prompt and has a great result for this group. There are also other things you can do before you issue the invoice that will increase your chances of being paid on time, such as discussing progress with their order, or work currently undertaken. This also allows you to clarify payment terms prior to completing the job and issuing the invoice. It is important to be extremely clear with your client with regard to your terms and expectations.

Customer is disorganised

Once again, the best approach is to start early and make it easy for your clients to pay.
If they are disorganised now they will still be in trouble in sixty days!  Don’t join the queue of creditors, move to the front of the line. Stay in contact and be consistent. Get commitment on when they will pay.

Customer has no money

The intent is there but not the cash. The best approach is to start early and make it easy for your clients to pay. Getting payment arrangements agreed early ensures a greater chance of being paid in full.  Small regular amounts confirm the client’s intent to pay. If they are in real trouble, it is important to find this out early. It ensures you don’t continue doing more work for them. Alternatively, you might see an opportunity to assist them and help sort out their problems.

Customer is unconcerned and can’t be bothered

The best approach is to start early and be difficult to ignore. You must be persistent with this type of client. You should also consider alternative payment arrangements before you do further work. You should also consider whether you wish to continue acting for clients such as these, as they are likely to be outside your target client zone.

Customer is dishonest

Definitely not the type of client you should continue dealing with. The best approach is to start early and be difficult to ignore. Also, don’t get emotionally tied to having to communicate with this client. Ensure you have established rules internally and that your collection system is followed consistently.

Do no further work for this client. Decide on the strategy to have them leave your firm after they have paid in full.

Specific debt recovery techniques

• Ensure your credit terms have been fully explained to your customers from the outset as this takes the steam out of the situation. Obviously it is important to ensure your client understands your terms and conditions. Where possible have them sign an acknowledgement of accepting these arrangements.
• Price your fees in advance. In many situations, it is possible to do this, or at least give a good estimate. Do this in all cases where possible. No one likes nasty surprises, and it is important that the customer has a clear expectation beforehand of what the costs are likely to be.
• Provide alternatives for your customers to pay. Credit cards are so widely used, they are the obvious inclusion. You should also consider 'pay by the month' alternatives, and fixed fee arrangements where these can be used.
• The key to debt collection is the systematic and frequent follow up. If left for another day, the customer quickly gains the upper hand and will continue to stretch you and your patience! Don’t let them gain the advantage.
• Replace the ageing on your system. Replace the current ageing on your debtor statements with different terminology. Rather than using the traditional 'Current, 30, 60, 90, 90 ' terms, replace them with 'Due Now' and 'Overdue'. This immediately highlights the invoices which are due and those that are outstanding. This allows the follow up process to begin as soon as the account becomes 'Overdue'.  This means you are onto your clients early, and are a constant reminder.
• Providing alternatives means you are making it easy for your clients to pay. When making follow up collection calls, ensure you always offer the credit card payment option. Ensure your business has credit card facilities and do not be shy in offering this option.
• You MUST be regular and consistent in your follow up of debtor accounts. This will ensure you are difficult to ignore. Follow up calls need to be made every week with notes kept of the conversation with the debtor and promises and commitments made. Refer to these notes when next you ring, and remind your contact of previous commitments if they have been missed.
• Debtor management and debtor balances is an item of such importance that it should be included as an agenda item at meetings
• Invoice by email rather than post. Email provides an efficient method of getting the invoice to the client. You can specifically target who should receive the invoice and email it to them directly. Email also provides you with an online record of the correspondence trail.
• Invoice as close as possible to completion or delivery of service. Sounds basic, but get the invoice out as close as possible to the time you deliver the service or complete the work. This needs to be built into your business practices and procedures. The longer you leave sending the invoice the longer it will take to collect it.
• Always be courteous and professional. Of course you need to be courteous and professional with your debtor collection phone calls, it is a customer you are calling after all. Take the challenge, and see if you can strengthen the relationship while you have the client on the phone!

Fundamental rules of debt collection

• Collections should be a process, not a punishment
• Most clients are honest, and will pay
• Gentle, non-confrontational approach works best
• Be persistent and consistent
• Consider offering incentives

A series of gentle non-confrontational reminders will get most clients to pay. The key is to be persistent and consistent. As you can see, this process is really all about communicating with clients to ensure they are fully aware of your requirements.

One of the secrets of debt recovery is to implement a system that makes it as easy as possible for your clients to pay your account on time. A good collection system starts with the initial client contact and flows through the whole workflow process to invoicing, and then to any follow up.

It is the early identification of clients who have poor intentions regarding payment of their account that will ultimately determine the success or level of frustration of your system. One thing we know is this: not having a system will ensure you get poor results.

Where to go for help

Do it yourself

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