Introducing an effective debt recovery system can ensure that you act quickly to deal with debt problems and help minimise the damage of not being paid on time.
It is important to cultivate and maintain good commercial relationships with customers. However, if they do not pay you for the work you have done, or are frequently late in making payments, this can have a substantial impact on your business. This may include reduced cash flow, as well as an increased likelihood of having to pay interest on an overdraft facility or having to offer discounts to customers in order to increase the likelihood of receiving invoice payments.
Cashflow and bad debts are stated to be two of the principal reasons why small business fail. This can be resolved by having a dedicated debt recovery system, or credit control team, to minimise the impact of outstanding debts. It is not always possible to have dedicated individuals to manage the debts, and this may necessitate managers having to undertake credit control and debt recovery themselves. Precious management time will therefore be wasted chasing customers.
Many individuals also find this task hard work, and some may be uncomfortable speaking with a long standing (or even any) customer about outstanding monies. This can often cause a delay in dealing with bad debts which in turn creates further problems for businesses. In particular, an ineffective debt recovery system can result in increased debts with a particular customer. This not only risks increasing debt and cashflow issues with your own business; it may also increase the risk of a customer failing, leaving you unable to recoup the outstanding monies.
If your business suffers with debt recovery issues, the ideal solution may be to employ an individual dedicated to recovery or credit control. However, due to the increase costs, this is not always possible. If you are unable to employ an individual in this capacity, it is important to manage payment from the very start of every business agreement. This involves building good, open and honest relationships with customers: a rapport which may assist when difficult topics need to be discussed.
The initial approach should not only be to build a rapport with the customer, but also to assess the risk to your business. In particular, should you consider giving credit to a customer, it will be important to assess the level of credit you will afford to them (including, but not limited to, the risk of the customer falling into arrears of pay and/or not paying the debt at all). There are various products which can give an overview of a company, and which assess its profitability and the risks of affording that company credit. These are not cheap however. The most cost efficient way may therefore be asking other companies who trade with the customer for references.
It is also worthwhile enquiring about your customers’ systems and procedures for the approval of invoices. A customer may not be in a position to pay invoices for 60 days, regardless of whether you require payment within in a lesser timeframe, due to approval requirements or other reasons specific to that particular business. It is important to know this from the start of the relationship to avoid being left in a difficult position or wasting time chasing debts later. This allows you to manage the business effectively, as well as your relationship with the customer.
Putting these systems in place should make it easier to manage customers, and to reduce the burden of outstanding debts.
No matter how good your systems are, there may come a time when you are required to speak with a customer to recover monies. Although this can be extremely frustrating, it is important to deal with these matters up front and without delay. This allows you to establish whether there is any complaint about the work you have taken at an early stage, or to recover the monies swiftly with limited impact on cashflow.
If the debt is not recovered swiftly, that does not mean that it cannot be recovered. It may just take a little extra time discussing matters with the customer. When doing so, it is important to remove the emotion from the situation, which can sometimes be difficult, and try to remain professional and courteous at all times. Provided this approach is taken, you should (hopefully) be able to recover the debt without the need to escalate the matter further.
In the event that you are continually chasing the debt and it is simply not being paid, you may have to take matters further. There are a number of options available to you. The most cost effective can be instigating court proceedings. Doing so could conclude the commercial relationship between the parties. However, a customer who does not pay for the work you undertake is not necessarily a customer you want.
Unpaid debts can have a significant impact on your business. Implementing systems from the start of a relationship can mitigate the issues involved: reducing the number of unpaid debts or assisting the recovery of those debts without substantial impact to your business’ cashflow.
Backhouse Jones has a dedicated debt recovery team, with fixed costs being available on debts below £10,000.00 and a competitive, bespoke package available on debts over £10,000.00.
Should you wish to discuss this product, or any specific problem with unpaid debts, please contact James Lomax or Libby Ashton on 01254 828 300 who will be happy to help you.