Let’s talk Business:Six Steps to Avoid Bad Debt
How well you do your debt collection can make or break your business. Every business has different methods and issues … so let’s look at some of the key factors in running a successful Debt Collection process in a typical business. By typical business, I mean one that offers credit terms to its customers and sends out invoices.
1. The When and How of Sending Invoices?
When you do your invoices can have a huge impact on your cash position. Hard to believe but many business owners send out invoices when they are starting to run out of money. This usually happens in small businesses that get overwhelmed by paperwork. It’s easy to get sidetracked with sales, marketing and delivering a product or service and fail to collect payment.
If you don’t keep the working capital coming in, you quickly struggle to run other aspects of the business, like paying suppliers and your staff etc. If you can get a systematic programme for invoicing, you are well on the way to good financial management. The sooner you can invoice your customers, the less money you need to find from elsewhere, such as bank loans or equity loans to cover running costs.
2. Giving Customers Options to Pay
Giving your customers as many methods of payment as possible, is a sure fire way of increasing the speed and your chance of getting paid. Not all customers work the same way. Some people still like to write cheques, some like to pay by Cash. We live in an age where there are so many methods of payment available, so why not utilize them all to ensure you get paid, one way or another.
3. Terms of (Business) Trade and Credit
It’s interesting how many businesses get excited about their product or service and completely forget about the importance of getting paid. Getting paid is the first thing you should think about in any business. This means you need to ensure your customers understand how much, when and how they should pay you. The best way to achieve this is to have a simple ‘Terms of Trade’ or ‘Terms of Business’ document. This can be given to the customer when you are going through the sales process or emailed at any time. That way there can be no excuses for none or late payment. A good ‘Terms of Trade’ document should also contain a clause about ownership of any goods until they are paid for. Such a clause can save a business from financial ruin where a big customer goes into liquidation holding onto unpaid stock. If you have an ownership clause, you may have the right to retrieve goods unpaid for.
4. Statements/Reminders – Why Every Week if Necessary!
As mentioned above, sending out invoices and letting customers know the terms, doesn’t guarantee you will get paid on time. You need to let customers know you are serious about getting paid. The best way to do this is to send out regular statements. Statements not only remind customers it’s time to pay, but let them know you are ‘on top’ of the situation in relation to outstanding debts. If unscrupulous debtors get the impression you aren’t organized about debt collection they can take advantage of the situation.
5. Debt Collection/Recovery
It’s interesting how many business owners write off perfectly recoverable debts. For some reason they feel it’s not worth the effort to employ a debt collection/recovery agency to collect the debt for them. If you have exhausted all efforts to get paid by a customer I can highly recommend employing the services of a good debt collection agency. This is an agency that specializes in debt collection. At this stage you may not want to do any more business with the custo
mer so getting tough should not be a problem.
6. A Small Investment in Debt Management …
… can save you heaps later! All of the above will happen if one person is allocated the responsibility for Debt Management. They may not have to perform all of the tasks but if one person is responsible to oversee the process … it’s more likely to get done properly. It may seem like a large expense but the cost of not managing debt collection can be very high, in terms of lost working capital and accumulating bad debts.
The author works with Maisha Consults Ltd.