“Collecting debt is notoriously difficult particularly for smaller businesses worldwide,” says Cape-based strategy and business consultant, Laurence Dann. “Problems are exacerbated locally where uninformed business owners and entrepreneurs neither implement proven debtor management systems nor issue orders and invoices that comply with the basic laws of a legal agreement.”
As a consequence, he believes, seasoned debtors – who relentlessly look for ways of improving their cash flow (not yours) – easily find loopholes that enable them to take advantage of inaccurate documentation and/or lax administration.
To avoid these problems, Dann recommends that managers take the time and trouble to accurately establish an ordering and invoicing system that clearly sets out terms and conditions, and which compels debtors to pay on time and without question.
Orders must be prepared as legal agreements. They should:
• be lawful, clear, certain and detailed in their terms;
• comply with relevant formalities;
• provide parties with contractual capacity;
• be issued only when parties have serious intention to contract;
• certify that parties are in absolute agreement regarding the subject matter; and
• confirm that performance/delivery is possible and realistic.
“These requirements seem simple and obvious. Perhaps that is why they are ignored by many business managers, causing significant losses, legal fees and stress,” says Dunn.
Invoices should be issued immediately. Preferably the invoice should be delivered and signed for at the same time as the product or service is delivered. The document should include:
• clear reference to the order;
• an exact deadline for payment, for example, not “Payment due in 30 days” but, “Payment due before 30 March 2011”;
• all your details, including bank details for direct transfer with bank name, account name and number, branch number and branch location. Also, where you are registered for value added tax (VAT), ensure that your VAT number and that of the debtor appear on the invoice;
• a contact name and number for queries;
• a payment slip or fax-back slip to confirm electronic payment, and where posted cheques are used, a reply-paid envelope.
The ideal invoice should contain all the information clients need to make payment. The easier it is for them to make the payment, the quicker and more likely they are to do so.
Send regular statements as reminders before payment is due.
Unfortunately, even if you process accurate orders, invoices and statements quickly and efficiently, you cannot assume your clients will pay on time. The expression “ask and you shall receive” should be your operative motto in this regard and, as uncomfortable as you may find this job, it could make or break your business.
In their book, What To Say When Your Customers Won’t Pay, authors Judy Smith and Michael Shulman recommend the following when you begin making calls to collect money:
• Remember you are collecting a legitimate account and that you are entitled to be paid. You are not asking for any special favours. Debt collection is essential to achieving financial success and your company will function more effectively when accounts receivable are paid.
• On the other hand, keep in mind that as much as you do not like asking for payment, invariably your client feels worse for having to be asked. Be polite and ensure that the invoice was received in good order before requesting payment.
• Speak to the authorised person and do not be tempted to take a hard line with his or her subordinate in the hope that message will be passed on.
• Use the collection interaction to build a positive relationship with your client. This is particularly important if you want to collect the money and retain the client for future business.
• Be persistent. Debt collection is a crucial business activity and you should pay as much attention to this as you do to making sales. Do not procrastinate.
• If you are not going to do it yourself, appoint and train a confident, personable and professional person to collect debt.
• Pay your own invoices on time. This will install a sense of urgency and will give you the confidence to chase accounts.
“Remember too, that irrespective of everything you do to reduce bad debt, there will always be some accounts that will never be collected. Identify these early and save yourself a great deal of time and money by not doing further business with the client,” says Dann.
There is however, an entirely different view on debt collecting for small and medium businesses. Jean Gonsalves of Johannesburg business performance enhancement company Actionwise International believes that business owners should not be involved in the collection of their companies’ debts.
“It (debt collection) is an entirely different role to the one the owner of a business should play,” she says.
“The business owner is a visionary who is responsible for reach-out projects. He or she is the organisation’s best public relations person. The debt collector, on the other hand, is not necessarily a ‘good guy’. If this person is pleasant and gentle, you will have plenty of outstanding monies.”
Gonsalves says the ideal solution is to out-source debt collecting: “This can effectively be done, for example, by your outsourced bookkeeper for a small fee of 10% of the debt.”
The preventative method, she says, is to have financial systems, reports and analysis set up in such a way that they can be reviewed on a weekly basis. This will help avoid any unexpected emergencies at the end of the week or month.
(This article first appeared in Business Day’s Real Business supplement in February 2006.)