7 Ways to Collect Your Debts!
This post looks at what happens when you have asked (and asked again) for money due from a customer but without success. You are told it is in the process of being paid, yet still nothing happens. So what can you do about it?
Collecting money from overdue debtors is one of the most frustrating and annoying areas of business. You never imagine that it is going to be a problem until it is and then you find that because it is a historic issue, it has now become a difficult problem to deal with.
The simple answer is to recognise that there are multiple parts to the sales and subsequent payment process, and so in response you should approach the problem in a granular fashion - this is what I show those I work with and it has proven very beneficial to them in getting paid on time.
1) Understanding the Business Environment
It is important to explain your business environment to your customer long before you start asking for payment of outstanding invoices.
Tell customers about your company, show them the people who work in your business, explain the way that your supply chain works.
Make your business real to the customer rather than just being a product, a service they need or worse just a supplier demanding payment.
I would even go so far as to recommend that you explain to customers how your business is financed so that they begin to appreciate the detrimental effect of any late payments, perhaps resulting in higher prices to them in the longer term.
Discussing payment terms at the time of making the sale may not be comfortable but it is part of the deal, so put it on the table when agreeing the price.
2) Follow the Process Trail
It is surprising how few people work out what happens in their customer's office environment.
Where does your paperwork go?
What happens to the invoice when it is delivered?
Who in the office has to approve it?
Who decides to even present it for approval?
The Purchases Clerk may be the most junior member of the accounts team but he/she has enormous influence over who gets paid and when. Very few suppliers (you!) ever try to meet this person, to get to know them except when writing strongly worded payment demands. Big mistake! All you need do is be a little bit interested. Your goal in knowing this person is to make sure that your invoice makes it into the pile pending approval, because, if it doesn't make it, you are not even beginning to get paid!
My advice is to take a close look into your customers' business process so that your invoice makes it into the pile by doing some or all of the following;
Identify the actual route your invoice follows
Know what the timings are in your client's accounts department
When invoices are sent for payment approval (weekly, once a fortnight, or once a month)
When cheque runs occur (when the boss is around - really!?)
3) Constant Engagement With Your Customer
You should have someone from your organisation
Check when your invoice passes each hurdle in the customer's payment process
Keep detailed records of conversations held.
This will help to identify any invoicing errors and problems early on, giving time to fix them. Perhaps most importantly, doing this before the invoice is due sends a strong signal to the client that your organisation is on the case and will not tolerate a payment delay.
4) The Cost of Payment Delay
When you borrow money from the bank, the bank will charge you for the pleasure. It is relatively easy to work out how much. So when you are not being paid in advance, you are effectively lending money to your customer and if you need to borrow that is costing you as well.
You should calculate how much it would cost the debtor if the bank lent the money to your customer. Also calculate how much you would earn, either from the bank or by re-investing the cash if you were paid the money and had use of it immediately.
Once you have done this, you will suddenly realise what each party is gaining and losing in the delayed payment. On the basis of these calculations it may be worth offering your clients a early-payment discount, which will allow you to repay your borrowings and save you the cost of interest and bank charges.
5) Monitoring Payment Behaviour
Keeping a record of these interactions is also important. Missed promises, substantial deductions, payment delays need to be tracked and escalated within both organisations. Escalation should not just happen up the line but also across to other departments in your company such as Sales to ensure that everyone is aware of the increasing risk of trading with a customer who is delaying payments.
Some customers will deliberately try to enacting general slow payment strategies hoping suppliers won't notice or react but this sort of behaviour can be highlighted in real-time by monitoring the trends and so something can be done about it immediately.
6) Incentives for Collections
Far too few credit and collections teams are incentivised to improve collection performance.
I have deliberately kept away from Working Capital ratios in this post (that is for another time) but it is perfectly easy to
Calculate your own Working Capital ratios
Identify some historic averages in the performance numbers.
Teams can then be tasked to improve on historical averages and then why not reward them with bonuses when they succeed. It is well worth it, as their extra effort will bring down both the cost, even more critically the risk, of doing business in your sector.
It almost goes without saying but I would recommend that the value of sales bonuses are linked to the amount of the sale, and timing of the collection of the cash. The timing of paying the bonus should definitely be linked to the actual receipt of the funds due.
7) Great Information Systems
Many issues crop up because the internal systems and processes are not streamlined or targeted specifically enough to maximise collections.
Accounts Receivable (AR) information should be automatically aggregated across multiple sources,
Invoice deductions etc should be precisely measured
Accurate information is needed on who owes, how much, when it is due, how overdue it is and who internally is responsible for collections.
Two problems come to mind
1. Lack of system automation that allows senior management to perform detailed drill-down into the up-to-date financial information on a day-to-day basis.
2. Financial staff who feel that they don't have the luxury of time to focus enough attention on this critical area of managing a business successfully.
These issues can be solved by reconsidering the manual, electronic and paper systems currently working in the business, thinking about how they might be improved and performing a cost:benefit analysis of such actions.
CONCLUSION
Debt collection is painful. Few people like doing it. When you lump it all into one pile for someone to deal with, long after the service or product has been delivered, then the task becomes even more onerous and difficult.
My advice is to recognise that the collection of debts is made up of many detailed parts and these should be tackled with the customer, throughout the course of their engagement rather than all in one go at the end.
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What do you think? Any useful tips to add to these list for everyone to benefit? What can be done to speed up slow payments, especially large companies who are trying to please the analysts, while destroying value and profit further down the supply chain?
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