The first step in collecting your money is in the preparation of the invoice. Some invoices have detailed terms on conditions of the sale on the back. Generally, this is unnecessary but it will do no harm. Consult your solicitor for advice on this subject. Your invoice should contain the following:
- Who are you invoicing: Is it a company, an individual, a partnership, a government department, a charity, a club or some other entity?
- Include your contact details.
- Record customer information. E.g. address, ABN number.
- A description of what was bought. Include more than just the product codes.
- How do you want to be paid? The more options you have, the easier it is for your customer to pay you.
- State your trading terms clearly. The most common trading term is 30 days. This means the payment is due on the last day of the month following date of invoice.
- Format your invoices to make them easy to post. Normally, the company’s name and address is printed for a window envelope.
It is important that you post the invoice either with the goods or shortly after the goods have been delivered or just after you have completed the work. If you require progress payments, ensure that these invoices are prepared quickly.
The big skill in credit management is to balance the following three items:
- The need for customer retention, profitable repeat orders and referrals.
- The need for fast collection to boost your cashflow.
- The need for your money to be collected with minimum cost.
Before developing a collection plan, you need to examine your customers closely. In particular, how many customers owe you money? How large are your debts? How old are your debts?
Different types of customers require different collection strategies. There are a number of ways you can collect your money. Generally, there are five methods of communication.
a) Collect your money in person.
They are in order of most effective to least effective. However, they are also in order of highest cost to lowest cost. Surprisingly, collection methods have not altered much over the years. Email is not used very often even though it is inexpensive. Quite simply, it is very easy to ignore an email. Similarly, faxes can be disregarded. Most us will at least open personalised mail. However, you cannot guarantee your mail will get read. Telephone calls can be ignored provided you do not take the call yourself. It is more difficult to ignore someone who calls into your office.
So what do you do? Firstly, all is not lost. Most people will want to pay your account. Even those short of money genuinely want more money so they can pay your account. Only a small minority of your customers will be dishonest and you have the court system to protect yourself against these customers.
Which media do you use? Most companies will use almost exclusively mail and the telephone to collect their money. Here are some quick rules of thumb.
- The more accounts you have, the more likely you are to use the mail.
- The larger the account, the more likely you are to use the telephone.
- The older the account, the more likely you are to use the telephone.
Lately, I have noticed an increasing trend to rely more heavily on the telephone to collect overdue accounts. This is a mistake for two reasons. Firstly, you are forcing your customer to confront you. This is unnecessary for accounts which are just overdue because the majority of these accounts can be collected with a simple reminder in the mail. The early telephone call does nothing to promote future sales from this customer. Your customers may feel quite annoyed about being contacted by telephone so early in the collection process. It is not worth risking your good relationship with your customers by confronting them so early in the collection process. Exercising a little leniency when an account is just overdue is also an added benefit to your customer.
The second reason for minimising collection by telephone is the cost of phone calls. Sure, telephone calls may be cheaper than the mail but they are more labour intensive. You can mail more statements in an hour than you can make phone calls. Also, you can use your most junior staff to post your statements.
Here is my collection plan.
– Month 1 – invoice sent
– Month 2 (beginning) – Statement and thank you sticker sent if invoice was during the first seven days of the month. For invoices after 7th of the month, no statement is sent.
– Month 3 (beginning) – Statement plus early reminder sticker
– Month 3 (middle) – Statement plus firmer sticker
– Month 4 (beginning) – Statement plus query sticker
– Month 4 (middle) – First phone call.
– Continue to followup by phone until payment is received or the account is written off or legal action is commenced. Prior to legal action, mail a statement with a final notice sticker.
We have recently stopped sending current statements to all customers. If an invoice is mailed late in the month, it is a little unnecessary to mail a statement a few days later. Once an account is overdue, it is important to contact your customers every two weeks. The big advantage of this system is that it requires very little labour as very few accounts make it to 75 days, the time of the scheduled first phone call.
Source : Small BIZ Tips Newsletter Volume 3 Issue 7 by Ian Renton