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Collecting cash

Do not just sell and expect to be paid

Your objective is profit, not sales volume. Do what it takes to get the customers' cash into your bank account - fast!

So, what does it take? The sections that follow give more details on these points.

 

Get close to your customer

Apply the 80/20 ratio, i.e. identify the few major customers who buy 80% of your sales - therefore who pay the most.

The few major accounts

Get good credit agency reports to indicate the right level of credit. Get to know customers' payments staff. Visit them at intervals. Cultivate them to get priority treatment - as you would buyers. Give them priority attention on queries and service.

The mass of non-major accounts

Get the right individual's name for letters and phone calls, perhaps from credit application forms or routine correspondence.

 

Make your credit terms very clear

In a sales negotiation

It is professional, not anti-selling, to say 'we can allow 30 days to pay - does that give you any problems?'. Discuss it, don't duck it.

On an order acknowledgement

Stress your payment terms, as a condition of sale supersedes any buyer's terms. Send it to a named, responsible person.

On an account application form

Include a paragraph for the buyer to sign, agreeing to comply with your stated payment terms and conditions of sale.

On invoices and statements

Show the payment terms boldly on the front. On invoices, also show the due date; e.g. 'Payment Terms: 30 days from invoice date - payment to reach us by 14th March 201X'.

On statements, repeat the terms and indicate debts past due dates.

 

Open new accounts properly

Attitude

Treat this as the best chance to get payments properly arranged. The customer should expect to request time to pay and to be checked out. Don't deliver until you are happy to allow credit. Allocating the Account Number should be the control point.

Actions

  • 1. Credit Application Form: - obtain correct name, company registration number (for companies),payment address, person for payments, phone, fax numbers,e-mail details and acceptance of terms. Credit Application Form
  • 2. Get credit references or not, according to policy. Decide maximum credit amount.
  • 3. Allocate account number and set up correct account details.
  • 4. Send a letter to the payment person confirming the amount of credit available. By doing so, you are introducing yourself to the person who will be making the payments, as well as confirming your payment terms and reiterating the amount of credit available. Click here for a printable letter confirming the amount of credit available.
  • 5. Now you are ready to sell to the customer on a credit basis, use special ledger category for 3 months, with telephone contact, to get customer into good payment habits.
 

Issue effective invoices rapidly

  • Design an attention-grabbing invoice that is better than any you see coming into your own company.
  • Keep it brief and clear. Get rid of 'clutter' such as advertising and technical detail - the Invoice is for accounts staff to use.
  • Invoice within 24 hours of a chargeable event. Remember, nothing happens until your bill gets into the customer's payment process.
  • DO INCLUDE: payment terms and due date, date, delivery date and method, description, price and total payable and especially the customer order number or payment authorisation - essentials!
  • Send the Invoice to a named individual. Use FIRST CLASS post to beat customer closing deadlines. Use a courier for very large values.
  • You cannot expect customers to pay against incorrect invoices - make sure yours are accurate.
 

Using the internet for collection

What are the benefits of using electronic invoicing?

  • Reduce Days Sales Outstanding (DSO). E-invoicing helps retrieve money more quickly from your customers, by reducing the amount of time wasted whilst your invoice is in the post. The average DSO for a business is between 40 and 60 days, but businesses which have used e-invoicing have reported a fall in their average DSO.
  • Reduced print and postage costs. If invoices are sent electronically, money can be saved on the cost of paper, print cartridges, envelopes and postage.
  • Reduced requirement for sending out copy invoices. The direct delivery of invoices to the customer's inbox minimises the likelihood of them claiming they have not received them or that they must be lost in the post. Time delays are minimised, as copies can be resent and received by them immediately.
  • Faster dispute resolution. The sooner your customer receives your invoice, the earlier they can alert you to any concerns they have about their account or the amount due.

Issuing your invoices electronically

It is advisable to state your intention to invoice customers electronically in your contract and to ensure that they are able to receive communication by this means. For existing customers, write to them informing them of the change to your terms and conditions, and seek their agreement. Also verify the correct email address for the person responsible for making payments.

It is important to protect the authenticity and integrity of the invoice when sending it electronically. Therefore, your invoice should either be written into the email itself, attached as a protected word file or sent as a pdf document. Keep the wording and lay out the same as previous paper invoices to avoid confusion and, if possible, use delivery tracking to check that your email has arrived safely.

Print off and keep a hard copy of all invoices you send electronically as a back up.

HM Customs and Excise have issued a useful guide to Electronic Invoicing on their website.

Software

There is also a wide range of software available offering a more sophisticated means of invoicing your customers electronically. Software packages should ensure the secure delivery of your invoices, as they use encryption which prevents the email being read by a non-intended recipient.

Is email delivery of electronic invoices legally binding?

Yes. The Law does not distinguish between modes or methods of delivery.

Receiving payments by electronic funds transfer

BACS is the organisation established and owned by the major UK banks to provide the facility for transferring funds between them to settle payments.

An electronic file of payments is produced, either by you or a third party acting on your behalf, and is transmitted to BACS, which undertakes the transfer of funds.

This method of transferring money is referred to as 'Direct Credit', and can also be used for paying wages, pensions and employee expenses, amongst other transactions.

Benefits of receiving payment by electronic funds transfer

  • Can reduce late payment, as your customers' payments are automatically deposited in your account on the agreed date;
  • Money is delivered directly into your bank account, meaning you don't have to wait up to a week for cheques to clear. Cleared funds are available to you straight away;
  • Reduces the chance of cheques being lost or stolen in the post;
  • Saves you the trouble of depositing cheques at your bank.

Arranging for customers to pay by electronic funds transfer

Provided you and your customers have bank accounts, it should be possible for you to arrange for payments to be made by direct credit.

You should write to your customers to advise them that you wish to receive future payments in this way and provide them with your bank details.

Of course, it may be the case that your customer would prefer to continue making payments in the way that they have done to date.

 

Have a clear account display

An Aged Debt Analysis is the essential working tool for collectors and the best control document for senior management to monitor trends and weaknesses.

List accounts in order of size - largest debt first.

Computerised Systems - use an open-item version of the statement sent to each account showing all unpaid items - current and overdue - with disputed billings segregated for action.

Manual System - use paper copy statements as above, but change to open-item display as soon as possible (the brought-forward balance method is outdated and generates too many queries).

 

Achieve adequate collection coverage

Customers generally pay on time, or when chased, or when threatened.

Sellers must find time to know which are which and deal with them accordingly.

Methods available: VISIT - EMAIL- PHONE - LETTER - FAX.

A Stop-List can also be effective for products in short supply.

Visit the top few major accounts to resolve problems and build relationships while collecting large cheques. Sales staff can be allowed to do this as long as they act promptly.

Phone major accounts in advance of due dates to ensure payments are in process, in time to solve problems before your deadline. Phone all other accounts, working down the list by size of debt, according to time available. MAKE SURE OF ALL LARGE DEBTS BEFORE TELEPHONING SMALL DEBTS. Working in alphabetical or account number order is dangerous.

When contacting your debtors by telephone, it is important to observe the following:

  • Be systematic – incorporate phone calls into your collection strategy. A good strategy will timetable appropriate dates for issuing invoices, making phone calls and issuing reminders.
  • Be prepared – check that the information relating to the outstanding debt is correct, and that the information is readily available when making the call, i.e. the account number, the credit limit available to the debtor, the invoice date and the balance due.
  • Be courteous – remember that every contact your company makes with your customer can add to your existing relationship. A professional but friendly approach can earn your debtor's respect and cement loyalty.

 

Send letters to any overdue accounts too small to telephone. Two standard letters are enough after an Overdue Message on the statement. A polite reminder letter should be enough for customers who 'Pay when Chased'.

For those who only 'Pay when Threatened', a second and Final Demand is needed.

The intervals between the letters depend on company cultures, but 14 days is plenty.

If the Final Demand does not work, its threat must be carried out. Bluffs are soon seen as weakness.

Faxes convey urgency and often beat defensive barriers when letters are being ignored or phone calls diverted. They should be sent to senior people and are more significant when third-party action is mentioned.

Remember - phoning for cash is easily the most effective collection method.

 

Set targets and priorities

Policy

The company boss should make it clear to all relevant staff that the company is in busines to earn cash from customers and that a sale is not complete until it is paid for. All staff have a part to play. For example, account queries are not low-level clerical matters. They are complaints from unhappy customers who feel let down. They justify non-payment and should be resolved in 7 days as prime customer service priorities.

Targets

The rate of cash inflow should be reliably in line with sales made. Work to a monthly Cash Target to achieve a specific Days Sales Outstanding (DSO) ratio which measures Total Debtors against Total Sales made. There should be constant pressure to reduce DSO, which is the average time customers take to pay. Secondary targets can be set to reduce certain kinds of debt; e.g. overdue 60 days above £500.

Resources

Cash collection is highly competitive. Do not skimp on the rescources needed. A trained collector can only control about 600 accounts, making about 20 calls per day, amongst other work. Inadequate staffing rebounds in interest expense while waiting for slow payments plus some painful bad debts. It usually pays to separate collection from ledger work - the skills and time priorities are different.

Timetable

Every business should have a timetable for following up accounts too small to telephone economically, showing what to do and when, if the previous action has failed. See example below.

Example of a Timetable for following up accounts
Action to take Action date Days overdue
INVOICE 8 June 0
STATEMENT (not yet due) 3 July 0
DUE DATE 28 July 0
STATEMENT (overdue reminder) 3 August 6
POLITE REMINDER LETTER 10 August 13
STOPLIST 15 August 18
FINAL REMINDER LETTER 24 August 27
COLLECTION AGENCY 3 September 37
CASH RECEIVED 10 September 44

(Total time for revenue = 74 days)

This example may be seen as too tough by some and too lenient by others. What matters is that sellers have their own version.
Involve senior people as needed; aim requests for payment further up the hierarchy if normal contacts fail. Notify sales staff before stopping supplies - they may be able to get the payment. The Financial Director should sign Final Demands. Managing Directors should be kept informed of problem customers and asked not to override procedures.

 

Effective use of accounting systems to help manage late payment

Having appropriate financing and an accounting system in place can often be the difference between success and failure of a business.

The wrong type/mix of finance will result in a mis matched balance sheet with strain being placed on the business. Lack of control of working capital can expose the business to unnecessary and avoidable risks. It is vital companies control this requirement and use accounting systems to help predict when shortfalls may occur. One of the risks is late payment both when paying (reputation risk and future cashflow) and receiving (cashflow).

(Working capital = Inventory days + receivable days - payable days)

The list below highlights areas when the accounting system can help highlight late payment and its impact:-

General

Revise your cashflow to monitor the effect of late payment. What impact does this have on future working capital requirements? Use the planning/cashflow/projection software to highlight the work in progress and to avoid losing control of the business Use planning/cashflow/projection software to highlight and stop overtrading and/or unprofitable trading

Paying

  1. Use aged creditors to highlight when your creditors need paying
  2. Record any interest paid on late payment to monitor the cost
  3. Keep a record of creditor days
  4. Keep track of key suppliers (maintain relationship, speed of supply and prices) - this impacts on inventory, creditors, (working capital)

Receiving

  1. Use aged debtors to highlight when money may be received
  2. Record any interest received
  3. Set credit limits and review these for any late payers
  4. Keep a record of debtor days
  5. Flag any overdue debtor and put a stop on the account
  6. Keep track of key debtors/customers (review trading patterns)
  7. Investigate any unpaid invoice from a batch or any dispute quickly
 

Use third parties sooner than later

If customers ignore reminders, it could be because they are waiting for a significant threat; using a third party can have a stirring effect.

Collection Agents

They work on a 'no collection - no fee' basis and charge 5 - 15% of amounts collected, depending on complexity and volume. Good ones collect over 80% in the first month because of their third-party effect and full-time effort. Send all undisputed debts below a certain value to an agency after a certain time. This releases your own resources to collect large, current amounts from active accounts.

This Debt Collection Agent Checklist sets out the key information which the credit manager should have to hand when appointing a debt collection agency

Non-Court Action

Going to court is not the only way of resolving a dispute. There are other options such as negotiation, mediation, conciliation or arbitration. The civil legal advice website has a number of articles as alternatives to court.

Solicitors

They issue powerful letters in a short space of time, charging a pre-agreed fee. Find a firm specialising in debt collection, not just any solicitor.

Statutory Demands

can be sent by the seller, collection agent or solicitors promising an application to court for the formal Winding-Up of the business if payment is not made within 21 days. Alternatively, the seller can obtain a court order for the debt.

Court Action

Solicitors are essential for High Court actions but not county court. Fees are higher in the more effective High Court. Before suing, check that there is no known dispute, no other useful steps are possible and the customer has the means to settle.

If the seller decides to begin legal proceedings it is advisable that they provide the solicitor with all the necessary information pertaining to the debt in a clear and succinct format from the outset. The seller may use this Form of instruction to solicitors for this purpose.

The Form of instruction to solicitors is designed to ensure that the seller avoids the inaccuracies that can undermine a claim such as:

  • The need to ensure that the name under which the seller is suing matches up exactly with the name of the company or trading division with which the customer originally contracted.
  • The need to identify the status of the debtor, i.e. whether they are trading as a sole proprietor, as a firm or as a company. This is vital to ensure that the proceedings are being taken against the right party/individual.
  • The need to give essential information about the debt itself, such as the amount due, whether it has arisen as a result of goods sold and delivered, services rendered or work done and materials supplied. It is always useful for the solicitor to be given copies of invoices and details of the dates, numbers and payments due under each.

The Court Service provides free information sheets and leaflets on the debt recovery procedures available through a county court.

NOTE: Legal procedures in Scotland and Northern Ireland are different from those in England and Wales. Further information can be obtained from the appropriate Sheriff Court in Scotland or county court in Northern Ireland.

 

Measure collection results

  • The DSO result
  • The cash collected during the month versus the Cash Target set
  • An Aged Debt Analysis, showing largest accounts first.
  • Send a one page Debtors Summary at month end, comparing actual results with previous month and with any budgets made, to all managers and directors for action on major problems and trends.

This is a good prompt for talking to key customers about their payment dates.

If you improve the Debtors asset gradually, month after month, the faster cash soon shows in a healthier balance sheet.

A useful calculation is to compare the cost of the resources needed against the benefits of the extra cash being produced.

See the Quick step guide for a step by step approach to these procedures.

How to calculate your Days Sales Outstanding (DSO)

Your current days sales outstanding (DSO) is calculated by dividing the total amount owed to you by your sales per day. Your sales per day is calculated by dividing your annual turnover on credit terms by 365, the number of days in the year. e.g. To calculate the Sales per Day (when annual turnover is £1,000,000): £1,000,000 divided by 365 equals 2739.7

To calculate DSO (based on example above and when amount owed is £10,000)

£10,000 divided by 2,739.7 equals 3.65
Your reduced, improved DSO is calculated by multiplying the total amount owed to you by the percentage improvement in your collections activity (say 10 to 20%) and then taking the resultant figure away from the total amount owed to you before repeating the above calculation.
The increase in your cash flow is calculated by multiplying the total amount owed to you by the percentage improvement in your collections activity.
The reduction in the cost of your borrowing is calculated by multiplying the increase in your cash flow, above, by the percentage interest rate for borrowing money (say 5%).

 

 
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