How to improve your Cashflow by using credit management tools
Using the credit management tools available to you effectively can greatly increase your chances of getting paid more quickly. Making small changes to your collection strategy to incorporate all tools at your disposal can make a big impact on your collection performance.
Improving your use of credit management tools
Invoice
Ensure that your invoices:
- Are dispatched quickly
- Are accurate
- Comply with any contractual invoicing procedures.
- Clearly state the total value due
- Clearly state the due date (not 28 days from issue or similar phrasing)
- Contain your contact details including your phone number
- Keep the original email sending the invoice, so when a copy is requested, you can forward the original email to stop your customer delaying the due date.
By checking and double checking these aspects you will avoid potential delays in payment or disputes for incorrect information. Implement a courtesy phone call a few days after the invoice is sent to ensure that it has been received and iron out any problems that may arise before payment is due. If you cannot call every customer, calling new customers with regards to their first invoice is a must, as well as courtesy calls to both high risk customers and high value invoices.
Statement
Statements can be used as gentle reminders of the current balance of a customer’s account. This can potentially spur them on to make a payment of their own accord, or you can refer to a sent statement during a phone-call. I would recommend attaching a statement to any collection letters sent also. Ensure full contract details are on the statements, this is obvious but very often overlooked by companies; this makes it much easier for your customers to contact you if there is an issue.
Emails
Emails are a great tool in collection that should be strengthened with phone calls. Any agreements with customers by phone call should be followed up with an email confirming agreements particularly dates agreed and names of persons spoken to.
Standard collection emails (also known as dunning Letters) can be automatically generated by many finance systems and should be sent in a cycle, with the wording and subject of each subsequent email becoming firmer.
Final Demands/ letter before Action should always be sent by post (although a copy of the letter should be emailed as well as posting) see below paragraph on letters.
Calls
I have made my support of collection calls very clear in previous blogs and I will say it again, they are an extremely effective tool in building a positive relationship with your customer and to iron out any issues successfully. To summarise:
- Always prepare and have the full facts available when you make the call to be able to counter any potential excused for delays in payment.
- Summarise agreements at the end of the call (and confirm in emails, see above)
- There are many other techniques to employ to gain positive outcomes when calling customers, please see our factsheets in our toolkit.
Letters
Any Final Demand/ Letter Before Action should always be posted to your customer’s registered office to comply with the Court’s Pre Action protocols. I recommend you also email a copy of the letter to your customer confirming the original letter will be posted to their registered office and add a delivered & read receipt to your email. This strategy should add gravitas to your email and reduce customer excuses that they didn’t receive your letter Before Action.
Other notices may also need to be posted to your customer’s registered office or another address given in the contract for notices to be served. Examples of such notices are in the construction industry where ‘Notice to Suspend Performance’ letters should also be delivered by post. We have a host of collection letter factsheets and templates available in our toolkit.
Credit Sanctions
There are several different types of sanctions you can employ:
- Add interest & costs- Giving your customer notice of your intention to add interest, compensation and other recovery costs as details in the agreed terms and conditions or as stipulated in the Late payment of Commercial debts Regulation is effective leverage to getting them to pay sooner.
- Suspend account –giving your customer notice to suspend their account either for late payment or over credit limit is useful leverage and also reduces your risk to potential bad debt.
- If you do give notice to your customer, it is vital you follow through with actually suspending the account if your customer does not make payment as requested, otherwise you will loose future leverage as the customer will believe you are bluffing.
- It is important to ensure you have a specified and agreed contractual right to suspend service otherwise you may be in breach of contract. Under Common law, time of payment is not of the essence to any contract unless agreed.
- Cancel credit agreement– if your customer continues to pay late, you may want to advise them that you will have to cancel any agreed credit terms and they must pay on pro-forma in future. This action may result in you loosing the customer, but if you weigh up the cost of all the chasing for payment and financing the ‘loan’ against net profit, you my find it more profitable to walk away from the customer.
- Court Action- not something anyone takes lightly, however if you are not getting paid despite many requests, we recommend you act quickly. The older the debt, the more difficult it is to collect, customer may go out of business or move, if disputed you may need to rely on knowledge and witness statements from employees who have left and not least Statute of Limitations is 6 years.
Our Credit Management Toolkit can provide you with expert guidance regarding your credit management tools; take a look and see how it can help your business.
We also offer a support service where for a small monthly fee with no tie in, you can get direct advice from us, have unlimited access to our toolkit, get credit reports on your customers and we will send letter Before Actions to your delinquent debtors.
Please contact us to see if we can help 03332 413 203.
