Once an account is overdue, your customer should be reminded about it quickly, usually, 3-5 days after the account is overdue to allow for cheques posted on the last day of the month to come in. It is also good to give your clients a couple of days grace. Some clients will be offended when you tell them that their account is overdue when it isn’t.
For most accounts, I will not telephone the customer until three statements have been sent, one at 30 days, one at 45 days and one at 60 days. Then at 75 days, I will ring the customer. For very large accounts, say for several thousand dollars, I will telephone the customer at 45 days.
After 19 years of experience, this is what works best for us. The stickers on the statements are important to highlight the overdue account. It insures the account is read. I start with a friendly reminder sticker, then go to a more strongly worded firm early approach sticker until I use a query sticker at 60 days.
Many of you will find this policy very lenient but it has two benefits. The money is collected quickly and very little of my time is spent chasing money on the telephone. I would rather spend my time marketing my business since that is where the money is. When I do ring a customer who is late with payment, often it is simply an oversight and payment is made quickly but other times it will take patience and sometimes, negotiation to get paid in full.
Many credit managers believe this negotiating process should be subject to adherence to formal credit policy. In my view this is simply plain wrong. You do not want your skilled collectors being hampered by rigid credit policy procedures. Instead, you should rely on the skill of your credit officers to sum up each situation and each customer and act accordingly.
Basically, there are five things that can happen when you get on the phone with your customer.
- The account will be paid promptly.
- You receive a partial payment and organise for the account to be paid in instalments rather than as a lump sum.
- You do receive payment in full but only after considerable time and effort.
- You need to take legal action to get paid in full.
- You write the account off as a bad debt.
Let’s look at Option 2. Again, there should no rules such as “All instalments must be paid in full in three months.” Do not restrict your credit officers by forcing them to work within guidelines. Instead, trust your credit officers to get the payment collected quickly.
However, there is one rule that is worth making. A request to pay the account in instalments is an admission by your client that they are short of money. As a result, no further credit should be granted until the instalments have been completed and the account balance is back to zero. Then, it is very doubtful if you would offer this customer credit in the future. An admission that your customer is short of money is far more serious than the disorganised customer who simply loses your invoice.
The next step is to tailor an instalment plan to your client. The best instalment plan is the one that the customer has volunteered themselves. Here are some questions I would ask in an effort to get this to happen.
- “Can we expect payment of this account shortly?”
- If you get a negative answer and this involves a shortage of money on your customer’s behalf, then ask “What are you able to pay this week?”
- If the answer is nothing, then ask, “What are you able to pay this month?”
Always start by asking for the payment in full. What you are seeking is a promise to pay. If you can’t get a promise to pay the account in full, then you should be able to get a promise to pay the account in part. Once this is achieved, then you need to think quickly and propose an instalment plan that your customer is comfortable with. The first instalment is the amount proposed by your customer. Usually, the second and subsequent instalments will be the same amount with the last instalment being either slightly lower or slightly higher than the first instalment.
The amount of the instalment should be volunteered by your client but it is your job to decide if the amount is reasonable or not. Here are a couple of guidelines. Each instalment should be at least $300. (It can be less if collecting money from an individual.) Each instalment should pay at least 25% of the total due. (Again, the percentage can be less for individuals.)
The big issue with instalments is the frequency. Businesses tend to get a disproportional amount of payments at the end of the month whereas individuals tend to get paid fortnightly. The absolute maximum time between payments for businesses should be monthly but try and get a payment every three weeks or two weeks if possible. For individuals, fortnightly payments are acceptable but weekly payments are better.
The purpose of the instalment plan is to avoid collecting this money through the court. There is usually no need to go to court if your client genuinely wants to pay your account. Also, the instalment arrangement organised between you and your customer is likely to result in faster collection for your business through negotiation rather than court action.
The next step to consider is what to do if an instalment is late. Firstly, do not panic or make unnecessary threats. Just ring your client after the payment is late and get a second promise for payment. Do not get frustrated. Patience is the key here. This method of collection is better than seeking a legal remedy. However, if you are convinced that your client is able and yet unwilling to pay your account then legal action is appropriate. A written threat should be made before taking legal action. A small proportion of your clients will respond only after you take legal action.
Source: SmallBIZTips Volume 3 Issue 22 September 2010