Clear up those overdue accounts

Paid InvoiceOutstanding 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 solution or accept it, then restate your position
h) State the action you will take if payment is not received

In a telephone call always try for a commitment to payment. If you get any excuses that don’t sound right – usually saying the payment was made some time before, or “the check’s in the mail” – promise to investigate the situation immediately and respond with details within 24 hours. Resolve such matters immediately to prevent them becoming another basis for non-payment.

Once you have a commitment from your debtor send them a letter or email that restates their commitment and tells them that you’ll be looking for their payment on the agreed date.

In step 3 when you make a final demand you should definitely use a letter for legal reasons, but accompany that with a telephone call that tells them the letter has been sent and offer them a final opportunity to make payment before legal action is necessary.

Step 4 should only be taken when you’re ready and willing to go to court to recover the outstanding amount. Once you’ve given a final warning your communications are virtually at an end and the only way to resolve the situation is for them to pay their debt immediately.

Remember that legal action incurs additional costs and time. It is also likely if you win that payments will be spread over a period of time which will further delay receipt of your outstanding amount. Legal action should always be seen (by you) as a last resort.