Struggling with debt collection?

All businesses struggle with bad debts to some degree however, at K A Farr & Co we have seen many businesses whose cash flow has been crippled by their debtors.

Many of our clients have asked for advice on how to chase payments and for our tips and tricks on how to ensure that they don’t have any large outstanding debts.

By standardising our own debt collection procedures and following this process we have reduced our own debtors by 50%!

Step 1: Reduce terms and review conditions

Firstly, stop sending end of month statements – they cost you time, money and resources and are not necessary.

Decide on your terms. These can be cash on delivery (COD), or payment required within a certain period such as 14 or 30 days. For some customers you may decide to give them a longer payment period, these can be companies that you know are reliable and have worked with for a long time.

Once you have decided on your payment terms make sure that you put these on your invoices and include details of how to pay such as bank details for direct payments.

If a customer is worried about terms, they are usually not worried about when they have to pay rather how they are going to pay. If this is the case aren’t they a bad credit risk?

If you are unsure whether a potential customer is a credit risk, we offer a credit checking service using the Red Flag software, it is just £15 + Vat for a one off search. Running reports like these can give you piece of mind before moving forward with a customer.

Step 2: Choose the team member responsible (ideally not you!)

Separating the debt collection process from the business owner achieves better results and gives you time to focus on other things such as building your business.

Ensure that you stress the importance of the role to the team member responsible as it is a necessity that it is done as a continual process. Be sure to promise to support them.

Step 3: Have a clear ‘aged debt’ report

Any good accounting software will have this function, or create your own simple spreadsheet using Excel (it’s much easier than it sounds we promise!).

An aged debt report shows the accounts overdue and by how much. Often they are defaulted at Current 0 – 30, 30 – 60 days, 60 – 90 days and greater than 90 days. Set the report to match the terms that you selected in step 1.

Have this report printed at least weekly (if not daily) by the person responsible, this ensures that your debts are constantly reviewed and you can see the progress being made.

Set targets. For example: over a period of time, how many accounts overdue in each category and the amount acceptable (obviously 0 is the target however, it takes time to reduce the list).

Step 4: Be prepared

Make sure that you have all the info you need, this includes amounts, invoice numbers, contacts and notes from previous calls and updates from debtors. Also, when speaking to customers about their outstanding payments make detailed notes of any conversations and promises (names, dates, times, etc.)

Pick a time daily or weekly for the calls to be made, block out this time from your diary to make sure that there are no interruptions and distractions.

Make it as easy as possible for customers to pay, this may mean making changes such as getting a payment portal in your offices. This will prevent any excuses and increase the likelihood of bad debtors paying.

Step 5: Set rules

When making a call to a debtor ensure that you know exactly what to say, being prepared will prevent you from making any mistakes when on the phone. There are two key things you can do to help this:

  • Develop a script for each call
  • Develop a standard letter for sending after 3 calls

If you would like to see our K A Farr & Co standard call script and standard debt collection letters please ask and we will email them to you.

Step 6: Set the tone

When speaking with your debtors use the following techniques to ensure the appropriate message is sent to them:

  • Use the “3 F’s” – Firm, Fair & Friendly
  • Don’t get into an emotional argument – stick to the facts
  • If someone has a problem, take all the details and get the person responsible to sort it out ASAP
  • If the customer becomes heated, rude or abusive, exit the call (sometimes this may even mean hanging up) and refer the problem to the Boss

Your team members are not being paid to be abused – they are just doing a job. If the customer does become aggressive the business owner must ring up this person and resolve the issue as soon as possible.

Insisting on an apology to your team member is vital as your team must feel supported when events like this occur. To avoid this problem in the future you may need to change these particular customer’s terms to COD or choose not to deal with them at all.

Step 7: Follow the contact schedule

Making sure that you follow the schedule that you have put in place in terms of sending letters and making phone calls to debtors is vital.

Planning this schedule and allotting time to each exercise will enable you to really make headway with reducing your debtors list.

Step 8: Don’t avoid the problem

We understand that it may seem like a bit a pain chasing debtors however the longer you leave it the more difficult it will be to get your customer to pay!

Remember under contract law, at the time of sale they agreed to pay for your product or service on the terms you specified. If they haven’t they have broken the contract.

In some cases, customers may be under significant financial pressure either on a personal or business front. A payment solution may need to be arranged:

  • The customer needs to admit they need help to pay
  • The right blend of empathy and responsibility is needed
  • Get the payment plan in writing and signed off by both parties
  • It is better to help someone through and be paid than to alienate them and not be paid

At a certain stage of the process (usually after the 3rd call) be prepared to put the customer on “Stop Supply”. This may be difficult decision however do not allow your customers to create more debt if they are bad payers – they will only continue to owe you money!

It is also surprising how many businesses will pay the bill when they need something else.

Step 9: Review

Regularly review the call sheets and meet with your team to identify businesses that are habitual bad payers.

If they are you have two options:

  • Put them on COD or at least reduce their terms
  • Choose NOT to deal with them

By implementing this simple process, we can guarantee that you will see a big reduction in your debtors list!

Don’t forget, if you want to run a credit check on a customer or supplier we can run a full report using our Red Flag software – costing just £15 plus Vat for a one off search.

For more information or advice on reducing your debtors, do not hesitate to contact us by calling 01704 211434 or email us at info@kafarr.co.uk.