Debt Collection – creating a healthy balance
Effective debt collection for any small business means striking a balance between keeping customers happy and being paid on time for the products of services you offer. But how easy is it to deal with late payments and keep on good terms with your clients?
Read on for our tips on how to collect outstanding debt quickly and easily.
Have a policy
Having a policy or a list of how you manage debtors means that you, your clients, and any employees, know the process of collection and exactly how your business goes about calling in debt. You should include this in your terms of business too, so your customers also understand how you address late payments.
A phone call to your customers is a great way to start – perhaps before the invoice is due. You might want to check they received it and ask them if there are any problems with the invoice. Then, a day or two after the invoice is overdue, another call to see if it needs to be sent again and ask when you can expect the money. Keep your calls short and polite at this stage and make your customers aware that you understand that we’re all busy and things might have slipped through the net. But do be clear that you expect to be paid promptly.
Use reports to help you manage your debt collection process
The most helpful report for debt management is the Aged Debt report. By regular reviews of this report, you’ll see quickly who is getting more behind with payments. Now is the time to make another call. See if you can understand why the debt is late. You can suggest ways in which you can help them – it maintains good relations and repeat custom.
Days Sales Outstanding is another handy report. It shows the average number of days it takes for a company to receive payment from sales – so it tells you how well your debt management process is working. The higher the number of days, the longer your business has to wait for payment of products and services you offer. Consequently, a lower number means that your customers pay their debts quickly. Small businesses rely heavily on regular payments, so creating the report also helps you calculate your cashflow throughout the month and which customers you need to nudge regularly. If your accounts software doesn’t generate the report automatically, speak to your accountant.
Send short and sweet payment reminders
Are your payment terms simple? If you ask for payment within a month, it’s reasonable to send payment reminders after three weeks. It ensures you remain on good terms with customers and if all this is automated, it saves you taking time out of your day to do the chasing yourself. A set of automated emails is easy to set up directly from your accounting system and keeps you in your customers’ minds.
Make payment easy
There are now so many ways to pay and be paid – and some are particularly effective for small businesses. GoCardless, for example, will link to your accounting system and, when you generate your invoice, automatically takes payment when the invoice is due – all for a modest fee.
PayPal is worth a look too, or you might prefer Stripe. Both are great for overseas payments and let your customer pay with a credit or debit card.
These sorts of tools are really helpful if you are agreeing payment terms – you can make it a condition of the payment terms that they sign up for a subscription, so payments will be taken automatically – no chance of them forgetting!
Payment still not settled? Follow up your call with a letter
You do want to be on good terms with your customers, and speaking to them will go far in creating an atmosphere of trust between you. But you also want to show them that you mean business! Determine the length of time you will wait for them to pay after the reminder phone call, and follow it up with a short letter restating the terms under which you do business with your customers.
Employ debt collectors if your customers still haven’t paid
Again, this depends on your policy of when you will call in debt collection agencies to deal with unpaid invoices for you. Your customers must be aware of your process of debt collection. Add it to the letter you send after your phone call. It doesn’t have to be threatening. Simply tell them that you use a certain company to collect debt for you and that if you customers need more information, they can contact you or the debt collection agency.
Of course, all of this is meaningless if you haven’t established your payment terms from the outset. All your customers, regardless of who they are, should know what your terms are before they do business with you. And if your terms change, you must give your customers enough notice for them to adapt. For larger invoices, you can ask for a payment upfront, whether full or partial. And offer a variety of payment options that suit both you and your customers. If you would like further help on managing debts and payments in your business, contact us today.
