How to Collect What You're Owed Faster
It can be easy to neglect managing your debtors when you're busy growing your business, but smart credit control is important. Debtors are any customers who have received products or services from your business, but have not yet paid for them. Debtors refers to any customers who still owe you money – whether they are delinquent in their payments, or are taking advantage of payment terms you've extended to them – for example, balance due in 30 days.
Find out how to get what you are owed faster – so you spend less time chasing customers and more time focusing on your business.
Collection is a process
Effectively collecting debt, or receivables is as easy as two steps:
- Set up a payment collection system
- Follow up with customers effectively
Set up a payment collection system
Putting systems in place to help minimize the risk of bad debts is your first step towards getting paid faster.
Tighten credit control
Stricter control over new customers limits your exposure to future bad debts, or uncollected receivables. Here are some tips:
- Ensure your business completes comprehensive reference checks before offering credit to new customers
- Set fair credit limits and ask your staff members to notify you if a customer wants to go over their agreed limit
- Approve any additional credit extensions in advance
- Develop a comprehensive Agreement, clearly stating payment conditions
Apply the same checks on applications for credit that your bank would carry out if you requested a loan. This can be especially important for new businesses that feel pressure to gain customers. Try to avoid being careless with credit checks – it might come back to haunt your business in the form of cash flow problems down the road.
It's important to put together your payment terms to encourage prompt payment. You could, for example, offer a 2% discount for customers who pay within 21 days.
Ensure that your terms of trade state exactly when you'll start charging interest on any overdue amounts, along with the rate you'll be charging. Don't yield to customers even if payment is only a day late.
Whether you decide to make any exceptions for those customers that usually pay promptly is up to you, but be clear that it's a once only exception because you value that customer's business relationship.
Implement a system where new customers have to sign their acceptance of your terms of trade before you offer them credit. Follow this up by emailing your terms annually to refresh their memories and alert them to any changes or updates. If you are unsure of what to set as terms of trade, go online and research common trade of term documents, and adapt those that fit your business. Always seek professional advice with your accountant or business advisor before you set your terms, as every business will be slightly different to what you need.
You'll show your customers that you are an astute businessperson who takes payment collections seriously if you have a systematic approach showing your customers that invoices are a top priority. By being organized and able to quickly reference a customer's account when they contact you, you'll be more likely to get paid faster.
Some ways you can project a higher level of organization include:
- Being professional, and ensuring all written communication with your customers is accurate, consistent and clearly shows contact details and the amount owed, along with expectations and payment terms
- Having a consistent schedule in sending invoices at the same time of the month and following up after a set number of days
- Show a layered approach to your invoicing. The customer's first invoice should show the amount due and by when, but the follow up invoice should state that they're late in paying. Any further requests for late payment should be firmer in tone, specifying interest owed (if any)
How to follow up effectively
The steps you've taken so far will help to minimize bad debts or late payments in the first place but should they occur, make sure you address them early.
Address issues quickly
Identify and deal with problem payers as soon as you can. The sooner you follow up with the customer, the sooner you'll get paid. Options include:
Your accounting system should bring to your attention any unpaid credit sales as they become overdue. Many accounting programs will automatically flag overdue bills, as well as generate reports of unpaid bills showing how long they've been late.
Once you've addressed any debtor problems, and invested in an effective system for keeping records of your unpaid credit sales, try to accelerate the collection of late paying customers, by:
- Calling them directly to discuss how a resolution can be made quickly
- Personally visiting them as a face-to-face meeting is generally more effective, if possible
- Consult an attorney about sending a formal collection request, if all other options have been exhausted and you're close to writing off the debt
Measure your receivables collection success
You'll have to measure the effectiveness of your credit management system after it's been implemented. This is important because if you don't monitor the process, you won't be able to tell whether your receivables collection is improving or not.
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