Well! We all know that we must collect money from our customers to make the world go round, but how many manage the process? In these times of economic downturn many of our customers are facing cash flow issues, just like ourselves, so how do we attract money into our pockets?
Understanding the process of debtor management is a crucial step in remaining cash flow positive. I know that these may be simple steps and common sense, but I do not always come across them in the businesses I work with. Here are some pointers to help you set up/enhance your debtor management process.
1. Always Vet Your New Customer.
The new customer acceptance process will depend on your business and your average sale value, so ensure you have a new customer form that details the questions that relate to your industry to screen the customer. Include past trading performance if possible and obtain credit checks to determine the appropriate credit limits. For example, if you are professional firm ensure you interview the prospective client to establish why they are changing professional firm; what it is they require from your firm; and what their current business issues are etc. *Getting as much information about your client upfront is important. Use your gut feel and do not be swayed with “big talk”.
2. Credit Policy
Communicate your terms of business in writing and the way you do business to your customers and your team. Align your policy to your risk profile. You want to avoid misunderstanding down the track regarding fees and payment terms. The prospective customer may not like your terms of business which is better sorted now than it would be in the future. Professional firms have a requirement to have an engagement letter that encompass relevant legal obligations, so ensure you cover off on these details. I suggest that you get acceptance by asking the customer to sign the payment terms and other arrangements e.g. Payment due 7 days after invoice date and late payments will be charged interest at 2% per month from due date and all debt recovery costs will be on charged.
3. Timely Invoicing
One of the important steps in debtor management is to invoice the customer as soon as they have received the product or service. This sounds a very basic step, but I see it time and time again when the invoice is issued weeks after the delivery.The value of the service is often lost and the urgency to pay has been diminished – “if you can’t be bothered to invoice me then I am not bothered to pay you!” Invoice in advance where possible.
4. Upfront Payments
Where possible receive funds upfront or at least a percentage.
Monthly/quarterly payments will assist the customer in meeting their commitment to you. Setting up regular payment terms with direct debit arrangements is most preferable. You should make this a requirement for all new customers.
If an existing customer is struggling to pay their invoice, then ask them to make regular payments in accordance with a payment arrangement. Three important aspects to this agreement are:
a) the customer must ensure that they can meet the fortnightly/monthly payment
b) Include the consequences of not meeting the agreed terms e.g. payment in full including interest will be passed onto a debt collector within 14 days of missing a payment.
c) the payment terms will clear the debt within a reasonable time period
8. Data management
It is essential that the debtor information is monitored and kept up to date. Knowing their payment performance will assist in better understanding on how to manage that customer e.g. they may not have made payments so the provision of service should be stopped. It will highlight possible risks and future loss of income.
As we are now at the beginning of the month, I challenge you to get your invoicing out and chase up all those slow paying debtors
It’s time to be proactive with your debtor management!