Staying on Top of Bad Debts

Bad debts are an area of a business that often gets overlooked.  If you are having issues with cash flow in your business, this is often a good place to start. Take the opportunity to look at the procedures your business has in place to avoid bad debt and how to tackle difficult clients.

Look at the items that you sell or the services you provide, is there a better way to manage customer payments?

  • Is there an opportunity to pay up front for the item or service you provide?
  • How about asking for a deposit upfront and then the remainder on receipt of goods or completion of services?
  • If you’re providing a service over a longer period of time, are progress payments an option for you?
  • Perhaps a discount could be offered as an incentive to encourage customers to pay on time? You will often see this approach on your utility bills e.g., Pay on time and receive a 5% discount.
  • Is the cost of the service you are providing clear to customers, so that there are no surprises at the end?
  • Are you on top of your invoicing? Can a job be invoiced in intervals so that the customer is not confronted with one huge bill at the end.

 Have you had a look at the layout of the invoices you are sending out to customers?

  • Have you made it easy for your customers and clients to pay you? Are you banking details and contact information actually on your invoices?
  • Do you have merchant facilities so that clients can pay by card, or perhaps BPAY could be an option for you? By making it easy for your clients to pay their bills you eliminate the excuses and delays.
  • Are your terms of payment clear on your invoice, do your account customers understand their payment obligations.

 What about sending out monthly statements?

Do you send out statements on a monthly basis? This not only reminds customers about payments, but forces you to have a look at who owes you money and keep on top of those clients. Perhaps send out copies of the invoices again with the statement, this means you can make a courtesy call a few days later to follow up e.g., “Just ringing to confirm that you received a copy of you outstanding invoice and statement in the mail”.

Staying in contact with your bad debts means that you are keeping the lines of communication open, this gives you opportunities to negotiate and keep track of their address and contact information.

What happens when your procedure fails and you end up with a bad debt?

Some people simply don’t know how to approach the issue, or believe that it is time consuming or expensive to follow up. This is why the key to getting on top of a bad debt is to tackle them early!

If sending out statements and invoices with reminder stickers haven’t work and follow up calls have been met with no response, try some of these options:

  • If you have open communication with the customer, discuss with them a payment plan. Can you come to some agreement that has them paying off their bad debts over a period of time. You may not be getting your money all at once but at least you are getting it in the long run. It is also important to send this option via mail or email giving the customer right of reply and this also gives you the opportunity to document the steps you have taken to make contact.
  • If the debt is large can you negotiate a price with the customer that covers the cost price of the item. Losing some is often better than losing it all!
  • Don’t fall into the trap again. Make sure that if you have a poor paying client that this is flagged to your staff. Make sure if they are selling another item or providing them another service, they get up front payment only.

If all else fails, there are numerous debt collection agencies that can assist you through the process.  Businesses are also available to step in earlier and act on your behalf, communicating and negotiating with customers. These people are the professionals and know the system and what you can and can’t do to get your money back. These companies generally require a percentage of the funds that they recover as payment for their services, so you need to weigh up the value of going down this path.

Always remember that throughout the debt collection process, make sure that you are not rude or abusive when you contact a bad debt. Do not harass the customer, this will not get the results you are after and will only harm your case in the long run.

If you follow these steps, keep your finger on the pulse and make sure that your company has a strategy in place, bad debts will be few and far between.

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