Till debt do us part

Debtor management is at the heart of all businesses: making a sale is all very well, but collecting the cash is ultimately what matters for the success of any company.

An efficient debtor-management process results in improved operating efficiencies, effective billing procedures and quick dispute resolution. A good process will also mean that less management time needs to be spent on administration and processing issues, thus freeing up senior management to focus on key strategic issues and on growing the business.

The starting point for effective credit control is to ensure that a credit policy, including the establishment of normal terms of trade, is set and adhered to, and only deviated from in the case of specific circumstances. The policy should be written down and circulated to all sales and finance staff. The process for authorising exceptions to the policy should be clearly set out and understood by all involved in the process.

Effective debtor management addresses the whole of the order-to-receipt cycle of the business, from customer acquisition to order and fulfilment, invoicing, collection and dispute management. Each of the steps in the process is examined below, along with some ideas on ways to reduce investment in debtors.

The time spent on chasing unpaid debts can be significant and disproportionate to the individual value of a debt. Putting in the effort up front to properly screen and evaluate the credit-worthiness of new customers is essential if bad debts are to be kept to a minimum. While risk taking is an essential part of business, each risk should be assessed before deciding whether to accept it. The same principle applies in assessing new customers. Credit checks can be carried out by specialist credit-reference firms to help evaluate the risk of taking on a customer.

Contracts should be put in place for all significant customers, detailing the terms of trade and allowing for interest charges on overdue amounts to encourage prompt settlement of accounts. It is also worth considering the use of retention of title clauses for all customers, to enable recovery of goods supplied in the event of them defaulting on payment.

It is not just new customers that should be vetted: existing customers may pose a greater threat if their businesses are suffering as a result of the current economic climate. Look for indicators of problems in meeting payments such as taking longer to pay, not returning phone calls and part-payments. All of these can indicate cash flow issues that could impact your business. Communicating promptly with the customer should quickly identify if there are issues and allow you to decide whether to retain the customer, to reduce credit limits or seek payment in advance for future orders.

The order process should be simple, quick and easy in order to maximise sales opportunities. Agreed terms and credit limits should be communicated and confirmed when taking orders. And the customer’s account should be monitored to make sure credit limits haven’t been breached before any new orders are accepted. If a customer has breached, or is close to, their credit limit, payment should be sought to bring the account back within terms.

Proper fulfilment of customer orders is a critical part of the process. The faster goods or services can be supplied, the quicker an invoice can be raised and cash collected. Failure to deliver goods to the correct specification or on time will lead to disputes and delays in settlement of debts, increasing the cash conversion period (the time from sale to collection) and distracting management’s time from more important tasks. Getting it right first time will help to facilitate timely payment by the customer.

Invoicing

• A number of simple steps can be taken to ensure the invoicing process is managed smoothly, including:
• Making the invoice clear and simple. Remove any unnecessary details from the invoice so the accounts staff who receive it can process it quickly
• Automating the invoicing process. Wherever possible, invoices should be automated and linked to the fulfilment process. Manual preparation of invoices is time-consuming and prone to errors
• Dispatching invoices with goods when delivered. This will speed up the booking of invoices into customers’ systems. If this cannot be done, invoice within 24 hours of supply
• Ensuring the accuracy of price, quantity and items supplied. Getting it right first time will reduce the cash conversion cycle. Where problems are identified, deal with them immediately by issuing credit notes and new invoices. Do not leave the issues to linger
• Ensuring terms are clearly stated on invoices, and that the use of retention of title clauses is highlighted on all invoices
• Ensuring addressee details are correct
• Following up promptly
• Sending statements if required.

By addressing the above, the collection process will be made simpler and faster, with fewer disputes.

The collection process is generally an area where many businesses can make simple improvements that will quickly lead to cash benefits.

The key to collecting amounts due and overdue efficiently is to be organised and have all the relevant information to hand. The single most important management tool is the aged debtors’ analysis, which should list all invoices by customer and due date. This document will form the control tool when you are dealing with customers in collecting debts.

Good communication with customers is essential to maximising collections. Develop this to ensure you will be at the top of their payment list when you call. Ensure there is clarity of roles and responsibilities within your business, including customer-relationship management. This will ensure the right people at the customer side are contacted by the most appropriate people in your company to resolve any issues. For example, your finance or credit control team may not be the right people to resolve an issue: it may require the sales team, the technical team or the owner.

Understanding your customer’s payment process can help simplify the collection process. If payment runs are done weekly, make sure you contact the customer before the run is due to ensure your payment is included. Consider changing collection methods, for example to electronic funds transfer or direct debit. This can deliver benefits both to the customer (in simplifying the payment process) and to your business (in having direct payment to the bank as well as certainty of payment).

The following simple steps should be considered when collecting due and overdue amounts:

• Follow up with phone calls (this is often the most effective method of collecting debts)
• Keep detailed logs of all key discussions with debtors
• Compile required documents that substantiate the outstanding amount
• Issue a formal letter requesting payment if credit terms are breached
• Make a personal visit to the customer to discuss the account
• Consider a potential retention of title claim to recover your goods in lieu of payment
• If settlement is suggested, discuss terms and consider the customer’s ability to pay
• If no progress is made, consider the legal position and the merits of issuing legal proceedings.

A number of other specific actions will help drive cash into the business, including:

• Focusing on collecting overdue debts that are unpaid because they are not being chased, there is an outstanding credit note, the account was not put on stop, or sales are overriding credit control
• Considering offering discounts for early settlement, especially to large debtors
• Considering netting against amounts owed to the customer
• Linking sales commission to collection
• Levying interest.

Look out for changes in payment patterns that could indicate financial difficulty and address them with the customer immediately. Where customers are having problems, empathise and offer solutions. Consider taking part settlement coupled with an agreed plan for payment of the balance, or look at renegotiating terms, including payment in advance for future supplies made.

Where the collection actions outlined above are failing to clear outstanding amounts further action may be required, such as issuing standard dunning letters and following up with legal action.

All businesses will at some time find themselves faced with customers who refuse to settle amounts due. Common reasons for non-payment include work not having been completed, defective goods or services, insufficient or absent documentation, warranty issues and contra charges or set-off.

Such disputes will often be best handled by senior management, who may be able to negotiate settlement in a more objective manner than those more closely involved with the situation that has given rise to the dispute. In some situations legal remedies will be required.

Efficient and effective debtor management is fundamental to a business’s success. By adopting a structured approach based on best practice, management can ensure that they maximise cash flow from sales and identify and deal with issues when they arise.

Alan Morris is head of KPMG’s Cash Management team in Ireland.