Increase cash flow with better debtor management
Prevention is better than cure
If you’ve effectively taught a client that they have 60 to 90 days to pay you, it is then very difficult to get them to start paying on time.
To avoid this, make sure you and your client both agree to the credit terms when you set a new account up. This may include discounts for early payment, or interest charged for late payments.
You can also understand the risk a customer presents to your business before things get out of hand with DebtorLogic – CreditorWatch’s ATB-analysis tool.
Communicate with your clients
Once these terms are in place, monitor them by communicating with your client so they are always clearly informed of when they are expected to pay. Maintaining your business relationships is important.
It’s also good practice to communicate about how late payments will be handled. For example, a three-step process may involve a phone call at two weeks late, a letter of demand at one month, and referral to a collection agency at two months.
If a debtor is already out of hand, don’t worry; you can still protect your cash flow.
A lot of micro-businesses are scared to request prompt payment because they feel they will lose business by being too demanding, and they let their clients elongate the cash flow cycle.
You need to assume a more assertive attitude, because once you’ve provided goods and/or services, you’re working for free until your customer pays you.
And if you don’t ask for payment when it’s due, that client is paying another business on time. The squeaky wheel gets paid first, so be that squeaky, indispensable, wheel.
Speeding up slow payers
So your client is paying at 90 days and you want them to start paying at 30 days? Changing their behaviour requires a gradual approach.
If you’ve let your clients pay on longer terms, you have to work with them to make changes.
Call them more frequently, and sooner than you usually would. For example, if someone is paying you regularly at 90 days, start calling them at 30 days and say “The invoice is due, can you please advise when it’ll be paid?”
Another method is to start putting pressure on them earlier. A week before the invoice is due, send them a reminder or call them up to make sure they’ve received the invoice and intend to pay on time. CreditorWatch has a suite of letter templates to use to fast-track your debt collection.
You don’t want to lose your client by changing your credit terms dramatically, but do explain to them that you need to be paid on time.
Dealing with exceptional circumstances
If there have been exceptional circumstances that prevent your client from paying on time, find out if what they’re saying is plausible. If they can’t afford to pay the entire amount, develop a payment schedule and be clear on the consequences if the instalment terms are not met.
Lastly, let late payers know that you are accountable to someone else: you may want to refer to a supplier waiting on the payment to flow through, or mention your accountant, business coach or a third party agent. This puts a little performance pressure on your client, as they know that a late payment will be visible to other parties. CreditorWatch customers will receive email alerts when a business is slow-paying or non-compliant, so news will travel quickly.