With the recession continuing longer than expected it is vital that you don’t allow late or slow payers to disrupt your cash collection and harm the success or continuity of your business.
Effective debt collection policy requires a system that should not be overridden other than by exceptional circumstances – discipline is the key. Not allowing customers to delay payment of monies due will avoid disrupting your cash flow. However, in the current climate businesses may have to accept payment by instalments. This should obviously be over as short a period as possible. You will need to decide if you wish or intend to charge interest relating to the late payment(s) i.e. statutory interest.
To keep debtors flowing smoothly, many businesses use a series of letters and telephone calls, all designed to ensure customers pay on time, every time. These communications start out friendly enough but progressively they become more serious and insistent as payments become overdue. You may be more comfortable telephoning customers, rather than sending letters. The important thing is to have a system and that you and, if applicable, your staff follow it. The steps outlined below will assist you to modify or review your system.
1. Customer Statements
Customer statements should be sent out promptly at the end of the credit period (i.e. 7 days, 30 days, 90 days as applicable).
Some businesses find it helpful to send a letter shortly before payment is due to encourage prompt payment but this should not be necessary for most businesses especially if you send statements. Note that some larger businesses will not pay until they do receive a statement so it is important that you are aware of your customer’s processes and requirements in this regard.
2. First Reminder
A friendly reminder letter or telephone call should be made 7 to 10 days after the invoice becomes due. You are assuming that the customer has forgotten, neglected, or lost the invoice and will pay with gentle prodding. If you are sending a letter also send a copy invoice with “now overdue” stamped on it. If making a phone call, note the customer’s response for future reference.
3. Second Reminder
Another letter or telephone call should be made 10 days after the first reminder has been sent.
This is a mild nudge to remind the customer that the account needs attention. This can be a short letter with a further copy of the invoice. Keep the letter friendly and non-threatening. Again if making a phone call, note the customer’s response.
4. Third Reminder
At this stage, it may be appropriate to speak to the customer if there has been no response to a statement and two letters. This should be made a week later to allow for post etc.
The customer may say he is experiencing cash flow problems or is dissatisfied with the work/service. Be courteous, but never take any criticism personally. Play it cool and if they are dissatisfied find out the reason why it had not been raised earlier. If this issue can be resolved over the telephone then where possible get a commitment to pay. Always be prepared to handle excuses.
For example, if a customer says the cheque is in the post, ask when it was sent so you can determine when it should arrive. Document your phone telephone call and if necessary send a confirmation letter of what has been promised.
5. Fourth Reminder (optional or go to fifth reminder)
A letter should be sent seven days after the telephone call.
Keep the tone of the letter consistent with the earlier letters/phone calls – courteous but direct. This letter may need to be personalised as a follow on from the previous phone call.
The letter should give a date by which payment should be made.
6. Fifth Reminder
At this stage, it may be more appropriate to send a payment notice. These are often RED and put an account on stop and give a date by which final payment should be made to avoid further action (i.e. court/debt collector) being taken.
Most businesses will either make payment at this time or contact you with a payment proposal.
7. Further action
If payment is not forthcoming this leaves the business with a choice of actions.
- Make a final telephone call to the customer.
- Send the customer a letter with the copy of a draft of small claims court claim form.
- Take the customer directly to the small claims court.
- Consult a solicitor with a debt collection department.
- Instruct a debt collector to call on the customer.
Please adapt the above to suit your business. If you would like to discuss your cash collection procedures or would like example letters please contact us.
April 26th, 2012
