Debt - how to reduce and eliminate it...

Are you your customer’s banker?

I’m assuming that you are not, in fact, a bank - in which case the answer to the question is obviously no.

Does your business make money by lending money to your customers and charging interest on the loan?

If not, then it’s worth reviewing the credit arrangements you have with your customers.

Some businesses, mainly in the retail sector, never extend credit to customers and no-one expects it. Customers come to the outlet, or maybe access it on-line, select what they want, pay for it by cash or by card - and that’s all there is to the transaction.

For many businesses, however, the traditional method is to provide the goods or services and then invoice - and this is particularly prevalent in businesses whose product is a service rather than a tangible item. Unfortunately, these businesses are usually also the ones where it is difficult to obtain payment up-front or cash on the nail. The reason? Well, it’s because what is being provided is to a large extent unquantifiable. If you are selling widgets, your customer knows (or can find out) the specification of the product, compare market prices and quite possibly strike a deal with you relating to volume purchased, frequency of purchase etc. The customer is also protected by statute if the widgets turn out to be sub-standard or not fit for purpose.

If however, your product is, well let’s say consultancy services in a professional field, the problem is that the customer doesn’t really know the quality of what he’s getting until he’s got it, and is therefore very unlikely to be prepared to pay up front. Also, if the buyer of widgets doesn’t pay, then you can go and take the widgets back (provided of course your terms and conditions are correctly drafted) and although this isn’t perfect, it does provide something of a remedy. It’s virtually impossible to take back professional advice once given, so it’s something of a double whammy.

Apart from service businesses, the other areas where you may find yourself extending credit facilities are in businesses where it is common for customers to have a credit account or where large orders are given which are payable by some form of instalment plan.

OK, so you are in a business where, for whatever reason, you find that you are providing goods or services without payment at time of delivery. Provided that all your customers are making payment in accordance with the terms you have agreed, this should not be a problem. Your cash flow projection (you do have one?) will simply be based upon payment coming in a set number of days after supply and all you have to do is to find a way of funding the gap between those dates. But if it was that easy, I probably wouldn’t bother making it the topic of this blog!

So what I’d like to do is show you possible strategies for coping with what the vast majority of my clients see as one of their biggest problems - credit control and its impact on cash flow.

• First of all - do you know how long it takes your customers to pay the bill? An absolute priority is a system which tells you not only how much debt is outstanding, but how many days elapse between supply and payment (debtor days), both on average and for individual customers. Ideally your system should also immediately flag up any account which is overdue.
• Do your customers know exactly when their obligation to pay arises? This will generally be a set number of days after invoice, or by regular instalments, or, if you have agreed on a running account with a regular customer, it could be something like paying a set percentage if the total amount outstanding every month. The point is that the terms should be crystal clear from the outset, to both you and your customer, in writing (in your terms and conditions of business and on your invoice). Remember - if you can’t show clear evidence of the payment date agreed, you will not be able to take effective enforcement action!)
• So, you’ve got the first two points covered, and you find a customer hasn’t paid on time - what do you do? You let the customer know - No? Why not? What’s stopping you?
• Are you afraid the customer will be offended and stop buying from you? My first reaction would always be either to send a polite reminder or to ring up and ask if there is any reason for late payment. If the customer is not satisfied, then now’s the time to find out and implement your complaints-handling strategy (see my earlier blogs). It could be that it’s a simple oversight and one phone call will bring immediate payment.
• OK, so you’ve done that, there’s nothing wrong, but you still haven’t got paid. What next? Some of the ‘reasons’ you may be offered include:

‘It’s our policy to pay only after xx days/only on the xth day of the month’ aka ‘we pay when we want’

‘Your competitors all offer longer terms’ aka ‘we may stop buying from you’

‘It’s only ￡xx’ aka ‘guilt trip’

‘I haven’t got the money’ aka ‘we’ve spent it elsewhere ie holiday, car etc’

‘I can’t pay it all at once’ aka ‘our customers haven't paid us yet’

‘Call back later’ aka ‘Fxxx off!’

I can’t tell you how much or how many of these excuses you should accept, but the point to keep in mind is that the customer’s made a contract with you which you have every right to expect to be observed. The time for the customer to say the terms were unacceptable was at the outset

• Still, you’ve got the problem, and the initial strategies I suggest are:

1. Offer an incentive for early payment (mark it on the invoice) but also include an    interest penalty for late payment
2. Find out what the average credit terms are in your sector - don't exceed these to say the least!
3. If it’s an ongoing service, structure it with monthly or instalment payments and stop work if an instalment isn’t met
4. Have a credit control plan which includes speaking to the debtor regularly until the account is up-to-date
5. If the customer has a ‘reasonable’ excuse, keep talking and offer a payment plan that gets the money and doesn’t leave you out of pocket
6. Restrict the customer’s credit until the account is up-to-date
7. Consider using a factoring arrangement for the future - there are many who offer a service for individual accounts
8. Don’t get angry - but if the customer gets abusive, put the matter in the hands of a debt-collector straight away - you don’t need customers like that!

You may think many of these strategies are over-simplified - but if you’ve got a credit control issue, are you already implementing these? Look at the average number of debtor days for your sector and see how you compare.

Every day that the customer doesn’t pay means that you are funding his business at the expense of your business. Make it easy for the customer to keep to the contract, by keeping on top of your trade debtors, offering incentives for early payment rather than penalties for default and implement a culture of openness and fair dealing.

This is a big topic and I’ve only scratched the surface - do let me know how you’re dealing with trade debts and credit control!