The problem with most of us is that we give credit to our customers but do not enforce the payment terms, for example how many of us have 14 day terms that we allow to reach 30 days before we take some action.
We need to stop this if we are to have a good cashflow and for our customers to take our terms seriously.
Like the snake analogy, you wouldn't wait to get the snake out of the kitchen until after it had bitten someone in your family. You can't afford to do that with your collection policy either. Too many businesses ignore the initial past-due accounts and before they know it, there is a big problem that requires a lot of time and money to fix. Has anyone experienced making a call to an outstanding customer after 30days to be advised they have not paid the account because they have questions on it? Reduce the time delays now. How you ask, there are a few simple steps that can be taken to greatly reduce bad debts and improve cashflow. They are:
- Have a signed Credit Application with all customers outlining your terms and conditions, for example that you charge credit fees, interest ect.
- Where possibly request purchase orders from customers and have proof of deliveries
- Make sure you have a process of keeping a record of all invoices issued and that remain outstanding, this can be done manually though I would recommend a good computerizes accounting system, more efficient and will pay for itself with your first collection run.
- Place on your invoices that all disputes need to be advised to company within 7 days of invoice date.
- Send a statement the day after your credit terms have lapsed for all outstanding accounts - apply Friendly Reminder Stickers, these can be faxed, emailed or posted, though we have found the most effective to be posted and faxed, emails just seem to get ignored.
- Within two days of sending out statement, start making calls - you need to be friendly, sympatric but firm, and make them commit to a payment date. For e.g. Hello Jan, we note our account dated 1 July is currently outside of our trading terms, please advise when payment will be made. Wait for their response. End with, if we do not receive payment by (nominate a date) we will be forced to (here determine what action you wish to take, this will be dependent on there answers, history and you position - options may be interest, placing account on hold, or passing to formal recovery).
With Note 5 and 6 the following need to be considered, as you do not wish to alienate your customers, as there will always be some customers out there that are good customers but march to there own drum. Points to take into consideration:
What is your relationship with this customer? It's unlikely that you will want to set out collecting on an account a day after its due if it is a family member or an extremely good customer who has an otherwise good history of paying the account.
How much money is due? If the balance is large and you're depending on it to pay your own bills, you may very well decide to collect after a very short period of time. If it's a smaller balance, it may be worthwhile to wait a bit.
How often should I review my accounts? This is a time to exercise some flexibility. You may want to review some accounts that are 30 days overdue on the 35th day and some on the 40th day. Doing this will prevent having 40 files one day and none the next. This is also a task that can be handed to a team member to do.
How do I verify that the accounts on my report are still overdue? You will need to coordinate your account files with the record-keeping
system, tracking sales and recording payments - whether it is a manually or through a software program.
As a final point things to consider regarding your Accounts Receivable Policy:
- Which accounts do you want to pursue collecting personally?
- Are there accounts that would be best collected by a collection agency?
- Which accounts should your lawyer pursue?
- Do you have so many accounts that it would be worthwhile to hire a collections specialist?
- Do you know enough about the law to avoid violating the laws that protect consumers?
- How will you communicate with your clients who owe money and how often?
- How will you keep track of these communications?
- When do you decide a debt is un-collectable?
It is imperative though that all communication with customers regarding outstanding account be documented, just in case the matter needs to pass to legal recovery.
The collections process can be an overwhelming and unwanted aspect of business. But it doesn't have to be. You just need a system in place and to enforce it and not allow excuses for customers.
Anna Kyriacou is the founder and CEO of AKA Group, established in 1997 as a total financial solutions destination for start-ups through to established small to medium businesses. With 17 years experience working with and advising clients in Australia, London, USA, Holland and South Africa, Anna has sought not only to deliver accounting advice but also to mentor them towards autonomous business success.
Anna is driven to help others help themselves, similarly illustrated by her commitment to community and charitable organisations. Operating with sheer professionalism in tandem with genuine caring, Anna applies a holistic approach to her client's business development and ultimate success.
