We have put together 10 top tips on how to avoid accumulating bad debt as a follow up to our article Debt Collection & Enforcement
The average days to pay 30 day invoices are 80.5 which is the worst in Europe. This affects a business’s cashflow and ability to pay its own suppliers on time therefore exasperating the situation.
The following is a list of things you can do to minimise the risk of bad debt and corresponding liquidity issues.
1. Don’t offer credit: The Latin word for “credit” is trust (to believe). So in offering credit you are trusting that company is going to pay you on time. As the average days to pay increase you may find trust is in short supply. As much as possible try to extract cash up front, or for larger jobs a deposit, with commitment to instalments and cash on delivery. At least this way you have some leverage over that customer.
2. Credit check customers prior to offering them an account: There are credit check agencies that track whether a company has good record in clearing invoices. Some banks also offer early warning software which spots when a previous reliable company is coming under stress and delaying payments.
3. Place accounts on hold if invoices are overdue: This prevents sales staff from increasing amounts owed by stopping new orders from being processed. Enterprise level software allows sales staff to see if a client has invoices overdue and some can put an automatically “on hold” until payment is received. Our Mamut Acconting Software can be found here: Mamut Enterprise Software. It is quite incredible the number of business’s that allow bad payers to increase their debt just in order to get the work,
4. Reconcile the bank account at regular intervals: Only when your bank account is reconciled can you confirm that payment has not been received.
5. Run up to date debtors reports to analyse late payers: Once the bank recs have been completed then that will verify that the “Aged debtors” reports are correct. Highlight the clients who are late payers. Some software will give you a report which tells you their average days to pay. Download the IT-EBS Debtor report template.
6. Contact customers with a commitment to pay: Contact the client to get a commitment from them to pay on a specific date. This can be done by email, sending a statement or by phone. The communication should have some sort of consequence or reward if the agreement is not held. All correspondence should be recorded (including phone conversations) as you need to provide proof to HMRC that the debt has been chased before writing it off. Most accounting system has a field to keep such records.
7. Offer early payment discounts: A number of business have solved the whole problem of ageing debtors by offering incentives to pay early. The normal is 5% within 14 days.
8. Charge interest on late payments: There is EU directive that allows you to charge a late payment fee on top of the invoice when payment has not been received on time (normal 5%). A majority of companies have not taken this alternative for fear of losing customers.
9. Do a purge of non-paying customers: Make a list of your customers who consistently pay late and inform them their account is no longer welcome. This may sound risky, but in each business that has gone through this process they have increased revenue by attracting a better class of clientele. You will also find late payers often give you the most grief and take up the most time compared with better paying customers.
10. Diversify your customer base: In relation to the previous point, try not to rely on only a few customers to bring in a majority of your income. This sort of dependence allows for unequal negotiations on price as well as potential cashflow problems if disagreements arise, if you have specialist product range to a few clients look at developing a wider selection to a new audience.
In my experience it is the English reserve that feels it is impolite to ask for money that allows some people to take advantage. An invoice is a legal and financial document that states “this is your money” and if someone doesn’t pay it is tantamount to theft. The same sense of care and security you give to your wallet or bank account should apply to you outstanding invoices.
Malcolm Ford has had 25 years business experience including working as a financial controller for small to medium business’s. He now implements enterprise software across a wide range of sectors
