With the challenges of the economy over the last few of years it is perhaps unsurprising that increasing cash flow pressures create deviant debtors who struggle to meet their obligations to pay their debts on time or at all. Every business has an, albeit reluctant, acceptable level of debtors at any one time, but effective debt collection is based on solid processes and procedures from the point of sale.
Good practical procedures lead to steady collections and cash flow permitting, in turn, growth and development. Based on our own experience of the technology sector, we are able to offer some key tips as follows:
1. Know your customer
We frequently find collections frustrated and/or delayed by virtue of paperwork issues. The most common examples include (i) invoices addressed to someone other than the contracting party (ii) the contract failing to identify the customer correctly by name, legal status and/or location or (iii) the change in identity of the customer not having been recorded and dealt with at the time. These issues are often exploited by debtors to delay payment or avoid payment in full. Training to the sales function within any business regarding “know your customer” is crucial. At its simplest you need to know whether you are contracting with a limited company or Plc; a LLP (Limited Liability Partnership); a sole trader or a partnership, and maintain accurate and up to date contact information for the same.
It is also important that you know the background of the customer and by carrying out routine credit checks this information can help you to decide what credit limit to set and/or whether to do business or continue to do business together.
For the larger contracts or, where there is a degree of uncertainty as to the financial probity of a customer, you should consider taking security for the line of credit to be offered. We offer detailed training to sales teams and account teams on these issues.
2. Terms of business
Make sure you have your own terms and conditions (whether standard or bespoke) relating to payment and default of payment which are incorporated into your dealings with your customers. These terms should be reasonable (to be enforceable) and should clearly set out your terms of credit, payment obligations and the consequences of non-payment. Effective incorporation of terms and conditions (outside of a bespoke contract) can be a trap for the unwary. Make sure that they are supplied or accessible to your customers and that your contract documentation makes it clear that these terms apply.
3. Credit terms and policies
A robust credit control procedure is crucial. Many businesses automatically issue a cycle of statements and demand letters but often these cycles are lengthy resulting in key triggers regarding customer insolvency being missed. We recommend a regular review of credit terms and a shortening (where possible) of the terms of payment to suit the contract and your cash flow requirements. Make sure that it is clear when the credit control process starts and is exhausted and take action as quickly as you can thereafter. It is often more productive to telephone or (where permissible in practice to do so) visit a customer to enable you to assess any genuine queries or potential disputes and/or if there are any financial difficulties in the existence now or on the horizon.
It is vital to keep an eye on your late payers. If the account becomes overdue, consider taking steps to place a “stop” on the account and or the suspension of the provision of services until the account is paid. Beware of any signs which show that they have difficulty paying and take advice on immediate action to protect your position. Getting to “the top of the pile” is crucial in distressed situations. We suggest a commercial approach to “can’t pay” situations and with this, consideration needs to be given to entering into a formal instalment agreement to preserve the customer relationship perhaps also with security to enhance your prospects of getting paid. Working with customers in their time of need is always encouraged as such action is often rewarded with customer loyalty.
Acting quickly may include:
- the issue of a formal Letter Before Action
- Issuing a Claim Form
- Entering Judgment
- Enforcement of Judgments
- Bankruptcy and/or Insolvency proceedings
Our clients are frequently bemused at the effectiveness of just one letter of demand from us rather than from the business resulting in payment (often with interest and costs). Our involvement at a defined stage in the credit process lets your customers know that you are serious and that the matter is out of your hands as you have exhausted all credit control efforts to get paid. Obviously, we can cease recovery action at any time if our involvement generates a dialogue between you and your customer which is productive.