4 June, 2013, by Francine Pickering

Martial Arts for Debt Collecting

Speaker: Professor Bob Berry, Boots Professor of Accounting and Finance, Nottingham University Business School 

As with any martial art, the art of managing receivables is as much one of staying out of trouble as dealing with, said Professor Bob Berry, and this process starts right from the point when new business is accepted. 

Turning a customer’s promise to pay into cash in hand:

• Involves requesting the payment;
• Benefits from understanding how customers process these requests for payment;
• Needs a system in plan for following up the status of these requests – and then chasing overdue payments when necessary.

First, it helps to understand the four “C’s” of ensuring payment happens:

• The customer’s Character – who they are, what their approach to payment is.
• Their Capacity – whether they have the ability to pay.
• Your Collateral – how you can safeguard your claim on the cash, such as retaining title on your products.
• Prevailing Conditions – even a customer who is a good, reliable payer in good times can become a less prompt payer in bad.

The kind of safeguards you can put in place include:

• Credit limits.
• Retaining title to goods.
• Providing the product or service as specified to avoid disgruntled customers.
• Being honest with yourself about whether you have given them any other reason not to pay and addressing them if you have.
• Allowing discounts or delayed payments rather than lose future orders if this is important.
• Ascertaining whether the customer will agree to better terms than their standard ones – some might for small businesses.

Understanding the customer’s processes is important, especially with larger organisations where the purchasing and payment departments will be different and not necessarily working to the same concerns. Bob’s advice:

• Be clear on where your invoice should be sent and send it to the right place.
• Make sure your invoice is clear about the product or service for which you are requesting payment.
• Make sure it is also clear about where payment should be sent.
• Include any customer references such as purchase order numbers and about all terms that have been agreed.
• In short, take a look at your invoice and ask yourself if you would process and pay it promptly in their position.

And if they still delay payment?

• Make immediate contact as soon as the payment is overdue.
• Ascertain if there is a genuine problem that needs resolving.
• Maintain contact over the short term – do not be the one to let the problem drag on for months.
• Be prepared to remind the customer of your legal right to claim interest on the overdue debt as well as a fee to cover costs of debt collection – a letter using the right legal terminology could be enough to jog them into action.
• Take a view on whether or not to invoke this right based on your need (or otherwise) to maintain the relationship.

And to prevent problems in future?

• Get a fresh pair of eyes on the situation or at least step back from it yourself.
• Consider whether there are sound reasons for the problem occurring that you can address.
• Look at whether there is anything “wrong” about your payment terms, whether they are generally a good fit for your customer base and whether they stack up against those of competitors.
• Think about whether this is really a good customer for you.

 

The audience said:

 “Clear, relevant and well presented.”
“Great content, great speaker.”
“An excellent event. More of the same please.”

The Ingenuity Knowledge Exchange breakfasts are free and open to all business owners. The next event is on the theme of A Fresh Approach to Strategy with Jim Cowan discussing how to organise your business to unlock its potential for innovation and entrepreneurship.

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