Systematic Cash Management and Debt Collection

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Every business should ensure that they have a debt recovery plan. This usually involves scheduling in a series of letters, then phone calls and eventually taking legal action or handing an outstanding debt over to a recovery agency. The longer a debt remains unpaid, the greater the chance that it will never be paid.

Every business should ensure that they have a debt recovery plan. This usually involves scheduling in a series of letters, then phone calls and eventually taking legal action or handing an outstanding debt over to a recovery agency. However this step should be seen as a last resort as a debt collection agency typically charges 10/15% percent of the debt as their fee. But then again 85/90% is far better than zero – and these agencies mostly operate on a no recovery, no fee basis.

1) Customer satisfaction phone call – before dispatching invoice

An unhappy customer is more likely to become a late payer or bad debtor. So before dispatching your invoice, think about calling the customer to enquire if they were happy with the service they received. Then forewarn them that the invoice is on its way and reinforce the payment terms eg. 30 days. For regular customers, you don’t need to call after every order, but an occasional call will let them know that you are thinking about them and their needs.

If you think an item may get queried, then phone and explain what the charge is going to be and get your customer’s agreement to you billing that amount. Confirm the conversation in an e-mail or letter.

Another valuable tip is to split items onto different invoices. If all your charges are on one bill then the whole amount is going to get held up over one small query, seriously hurting your cashflow. On the other hand if the queried item is on a separate bill, only that much smaller amount will be delayed.

2) First overdue letter – 7 days after due date

At this stage, sending a friendly reminder that the due date has passed is the best thing that you can do. If an invoice is less than a fortnight overdue, you must give the customer the benefit of the doubt that the cheque is in the post or that they simply forgot. You should send out a duplicate invoice with your reminder letter, with the past due date clearly highlighted. This then avoids the frequently used and abused ‘Oh but I’ve lost the invoice’, excuse.

3) Second overdue letter ‘7 days after the first letter (2 weeks after due date)

Again, this is more of a nudge than a demand. Keep the tone similar to your first letter, but point out that this is now the second time that you have written. Again, enclose a duplicate invoice. It might also help to nudge the tardy customer’s attention towards the Late Payment of Commercial Debts (Interest) Act (see below).

4) First collection phone call – 7 days after second letter (3 weeks after due date)

The invoice is now one month overdue and it is time to pick up the phone and speak directly to the customer. Be prepared for a barrage of excuses like ‘the cheque’s in the post’ and ‘we’re just waiting for a big customer to pay and then we’ll pay you next’. Be courteous and let the customer speak, but don’t end the phone call without getting a firm commitment as to when the debt will be settled.

5) First collection letter – on the day you make the first call (3 weeks after due date)

On the same day that you make the collection call, post out a letter first class which reiterates the payment date which has just been agreed.

6) Second collection phone call – 7 days after the first collection letter ( one month after due date)

If you have still had no response, it is time to make a second phone call. The account is now a month overdue and the longer a debt remains unpaid, the more likely it is never to be settled. Be polite, yet increasingly firm and ask for immediate payment. If the debtor insists that they cannot pay right away, make another commitment to a payment date.

7) Second collection letter – 7 days after new payment date has passed (40 days + after initial due date)

At this point, you need a change in the tone of your communication. The customer must now be made aware of the seriousness of the situation – and immediate payment demanded. Put the customer on ‘stop’ and warn the customer that further credit will not be available unless the matter is resolved within the next seven days. Send this letter, and all future communication via recorded delivery. This will let you know for sure that the customer has received your letter – and will communicate to them the increasing severity of the situation.

8) Third collection phone call – two weeks after second collection letter (54 days + after initial due date)

You are now telephoning the customer to let them know that this is their final chance to settle their debt. Warn them that the debt is about to be passed over a collection agency, which will not just incur them further costs, but could also potentially put them on a credit blacklist. Get the customer to promise to pay within 7 days to stop this procedure.

9) Hand over to collection agency – two weeks after final letter (68 days + after initial due date)

The account is now three months overdue and requires professional help. A debt of three months standing is statistically difficult to recover…….

10) Devise your own system

The outline procedure I’ve shown here may or may not be ideal for your business. Use it as an outline to devise your own system with more or less steps and longer or shorter time intervals.

Above all once you’ve decided on a debt collection procedure make it totally automatic process that is religiously adhered to.

One of the big problems that UK businesses have is that they invoice late and then don’t chase the cash in aggressively. It’s not something we feel comfortable with. And it’s been the death of thousands of businesses – so be more aggressive and make sure you stay on top of your cashflow.

The Late Payment of Commercial Debts (Interest) Act The Late Payment of Commercial Debts (Interest) Act was introduced on 1 November 1998. It automatically gives businesses with 50 or fewer employees the right to claim interest if another business pays its bills late. Previously, businesses were only able to claim interest on debts if it was specifically included in the contract or if the debt was being pursued through the courts. On 7 August 2002, the rule was amended to come in line with European legislation on late payment and now applies to businesses of all sizes. The introduction of late payment interest is not just meant to act as a deterrent, but as a way to maintain your profitability when your cash flow is not earning interest in the bank. For contracts dated on or after 7th August 2002 the late payment interest rate is 8% plus the reference rate. The current reference rate for the period 1st July 2009 to 31st December 2009 is 0.5% – S0 that’s currently 8.5%

Source by Phil Turtle

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