Maximizing Cash Flow

10 Strategies for Getting Paid on Time

If we don’t get paid, we go out of business. So with more debtors delaying payment in these tough times, taking action to collect money should be a top priority for small companies. Few small businesses can afford to turn customers away, but being timid about stretched credit terms puts your own company in danger. If you’re not being paid on time it’s harder to find money to settle your own outstanding debts. You didn’t start your business to provide a free credit service to suppliers. But how can you collect money owed, and at the same time, avoid bad feelings developing from previously reliable customers who are falling behind? Try these simple in-house strategies: 1. Review payment terms Re-assess your payment terms for the current market conditions. It could be time to offer additional payment options, such as PayPal, debit card, or to accept additional credit cards (with an appropriate added fee). Consider putting new clients on tighter payment terms on a trial basis with a review to follow, include a small discount for on-time payment if you can afford it. 2. Avoid firm tactics with regular customers Your regular, normally reliable, clients deserve different treatment in debt recovery. Perhaps they came on board years ago with a handshake and now seem like ‘family’? Try co-operation and communication, rather than a heavy hand. A phone call from the director will strengthen relationships between valued but dawdling customers and is a chance to personally explain the impact of late payments on your own cycle and survival. Be ready with options for part-payment or a suitable suspension of supply. Be concerned, but stay firm enough to get the account settled. 3. Credit-check all new clients It’s worth the fee to do a background check on new clients, despite the temptation to automatically take on anyone new when business is slow. The cost of your staff’s time chasing money and the potential price of debt collection later is not worth the risk. Besides, a reference check should be accepted as ‘company policy’ by new customers. 4. Focus recovery ‘power’ in the right hands Avoid the trap of turning your sales people or service staff into debt collectors. Mixing messages about employee roles will do more harm than good in the long term. Give the job of bad debt follow-up to one person, along with a set of clear guidelines for action and your full support. 5. Set terms at the sale The best time to get the message through about payment terms is when you close the sale. Outlining credit expectations early sets the right tone and foundations for later accounts follow-up if necessary. Make it a prominent part of the contract when customers place orders. 6. Empower your invoice Instead of a monthly run, consider sending invoices as soon as a service has been carried out or when a product is supplied. Print the actual due date on the invoice, rather than a “within 30 days” instruction. These simple changes will speed payment, improve cash flow and identify problem accounts sooner. 7. Calculate average debt age You run regular reports to check debt ‘age’, but how do you use the results? To measure average payments against your target terms, divide your accounts receivable by annual sales on credit (not cash sales) and multiply by 365. This shows how efficiently you are managing debts overall, compared with your goal, of say a 30- day payment cycle. A result of ‘55’ for example, will show you are averaging 25 days over your target. 8. Set a collection policy The chance of recovering...

Read More

Clear up those overdue accounts

Outstanding accounts are a business asset, but not one that a business really needs. The costs of collecting an overdue debt can be high over a period of time and put a big hole in your profit margin. Collections are best done using a pre-planned system and not handled on an ad hoc basis. The most effective collection systems use a combination of telephone calls and letters to get results. Collection efforts should be made in a series of communications that gradually increase the pressure on the debtor, ranging from a gentle reminder to the full-blown “pay up or we’ll sue you” type of demand. A four-step system can be used for most firms, bearing in mind that communications back from the debtor may require other steps. Step 1. A reminder that the debt is overdue Step 2. Reminder of the first letter and setting a date for payment Step 3. A final demand for payment by a specific date Step 4. Warning that legal action is about to commence unless payment is received immediately Start with a letter when an account is overdue. It’s just a reminder and gives the customer time to make payment within a reasonable period of time. It also gives them a chance to query the amount or any other details of the charge they’d like to find out more about. Be sure your letter contains the following information: a) The customer’s trading name b) The customer’s full street address c) Your invoice number d) Any reference the customer has provided e) A restatement of the purchase not paid for f) The outstanding amount g) Where payment is to be made h) Any options for payment (credit card, internet) i) A date by which payment should be made The letter should be sent to the person in your customer’s company who has the authority to deal with the outstanding account and make payment. It should be a formal piece of correspondence and be limited to only that message. Avoid ‘legalese’ and put it in plain English. If there’s no response to the first letter you then can choose between a phone call and a second letter. The aim is to increase the strength of your collection efforts. If you take a ‘softly softly’ approach with an outstanding debtor you could go to the end of the line and be paid only after more noisy creditors have got theirs. If your second communication simply repeats the content of the first one it’s likely to have exactly the same results. For smaller amounts the second communication can be another letter, reminding them of the first letter and telling them you still haven’t been paid but would like it by a certain date – seven days or so is recommended. If it’s a large amount in question and you haven’t heard back from the first communication you might want to get on the telephone and speak to the person responsible for paying the account. Even though this won’t be a threatening call it is a personal one, which indicates a stronger degree of concern than your first letter. Every phone call should follow a pre-set format: a) Make sure you have the right person with authority to make payment b) Briefly recap the outstanding amount and previous collection history c) Ask if the payment can be sent immediately d) If not, ask if payment can be made by a specific date e) If this date is rejected, state a date by which it must be paid f) Let them offer a repayment date g) Either reject their...

Read More