Six Strategies for your Business’ Collection Procedures
I have been told by businesses countless times that their customers are paying late despite the fact they are chased at the same time each month. I ask these businesses each time, if your current collection procedure isn’t working, why are you still using it?
Late payments are still an enormous burden on UK businesses, with recent research finding billions are owed. Whilst this figure is slowly reducing, arguably as the issue has garnered a massive amount of press over the last few years, businesses should have strong collection procedures in place to ensure that their risk to bad debt is kept to a minimum.
I understand that many companies have a certain pattern of working that they become accustomed to and that is very hard to deviate from, however, looking critically at current procedures, adding new procedures into the working day and measuring your progress to see if your hard work is paying off can make the world of difference, not only to your business’ cash flow but also for enhancing your job satisfaction.
Strategies for your Business’ Collection Procedures
Credit Check
Let’s say you meet a prospective customer, they are very keen to do business with you, and they can offer you large volumes of work, but do they actually have the ability to pay you for your work? Credit checking prospective customers (as well as ongoing monitoring once they become a customer) will give you an indication of that company’s ability to pay at that moment in time, and should be a vital factor when deciding whether to take them on as a customer or not. You are at risk of late payment and even bad debt if you take on a customer with a poor credit rating, a risk that can be reduced if you credit check them prior to carrying out any work.
Terms & Conditions
As long as your T&Cs are suitable for your business and accepted by your customer, they can be relied upon if your customer is genuinely or spuriously disputing your invoices to delay payment. Credit stop policies, late payment interest, late payment compensation, retention of title, adding clauses for time of delivery not being of the essence and time of payment is of the essence of the contract, there are many possibilities available to you to use as leverage when negotiating settlement in a dispute scenario. In terms of late payment interest, you may not even need to apply it, but suggest to your late-paying customer that you may have to add it to their amount if their lateness persists, and much of the time your customer will be spurred to pay you more quickly.
Chase high value as a priority
You will get more money for your time when you chase your higher value invoices first; I am also a great believer in the phone conversation rather than email conversations so I would suggest calling your higher values, confirm agreements by email if needed. That is not to say that small value invoices should be ignored, but using quicker methods such as email chasing will help to speed the process along; unless of course your customer with a small value invoice is quite a bit overdue, at that point you should phone them to discover the issue.
Proactive
For high risk customers, new customers (especially for their first invoice), invoices that are unusually high for a particular customer or customers that historically delay payment with poor excuses (needing a copy invoice for example), you should be much more proactive in your approach to collections. Calling before an invoice falls due, using a customer service tone, to check for any issues, these can therefore be dealt with prior to the due date, and remind your customer of the payment due date.
I should note that this tactic should only be carried out for the customer types stated above; customers that always pay your invoices on time should only be contacted once a payment falls overdue. Contacting good payers prior to their invoice due date has the potential to annoy them and may ultimately hurt the customer relationship.
Monitor Performance
Monitoring your collection performance is vital to not only keeping track of your progress, but also in identifying any issues that may need rectifying. Running a regular aged debt report is important, so that you can see which customers have become delinquent and which customers require more serious action. Calculate your debtor days so that your monthly progress can be monitored. Keep a log of all contact with each customer that is accessible to everyone that needs to see collection activity (this could be the customer’s account managers, sales or the management team). This is important for pre action protocols if you do have to resort to court action to get paid, but it also helps with strategy, if the customer comes on to sales with a big contract, its important they are aware of any payment issues.
Record and Measure Disputes
Measuring value and volume of disputes by reason will give you an indication of where the order to cash process may need refining. Say for example one customer disputes their invoice due to poor quality goods this does not indicate an issue, however, if 20 customers dispute their invoices due to the same reason then you most certainly need to review your quality control procedures as this will ultimately affect how quickly you will be paid.
Still unsure how you can apply these strategies to your business?
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