Why A Debt Collector Is Not the Answer

With more frequency than I would like when I tell people that I help businesses with late payment issues, they ask if I’m a debt collector.

Now there’s no doubt I need to get better at describing what I do, but I am definitely not a debt collector!

Before anyone thinks I have something against debt collectors let me set the record straight. Debt Collection agencies have their place. They have an important role to play when things don’t work out as planned despite your best efforts, but they should not be the alternative to best preventative practices.

Prevention or Cure?

Late payment of invoices is not the problem, it’s a symptom that there are gaps in the business’s processes and controls for granting trade credit.

Very late and non-payment of invoices suggests that there are gaps in the way the business monitors and manages trade credit risk.

Think about it, which is better?

Making sure your medicine cabinet is well stocked with sticking plasters and you have the local A&E department on speed dial or making sure your knives are safely out of the way from your five-year-old?!

Or put it another way…

Regularly having to use a debt collection service is like having a leaky roof and, instead of fixing the roof, you pay someone to keep emptying the bucket.

Eventually, the roof is going to rot and fall in on you. The damage it causes will be expensive to put right.

So why do so many businesses only treat the symptom of late payment rather than the cause?

Fear of Saying No

At some stage, we’ve all been in the position of wondering where the next sale is going to come from. Moving from feast to famine and (hopefully) back again can be a highly stressful experience.

This can make it difficult to say no, or at least not on those terms, to an opportunity to make a sale.

But not every sale will be profitable if you accept everyone who wants to buy. Some will demand discounts. Some will pay late. Others will take much more of your time than you bargained for, eroding your margin on that sale unless you have safeguards in place.

Needing the services of a debt collector is inevitable if you’re not selective about whom you give credit to.

“It might cost you something to say no in the short term but being fussy makes you better and stronger in the long term.”

Daniel Priestley, Oversubscribed

Overfamiliar Customers

We all want to build strong relationships with our customers, but sometimes this can go too far, and we start treating them like they’re our mates.

If we allow these relationships to become excessively friendly or informal it’s easy for customers to start taking undue liberties, like delaying payment, ‘because you know we’re good for it, right?’

At some stage, the relationship breaks down and that’s when you call the debt collectors in.

Giving the Customer All the Power

Have you ever felt uncomfortable chasing a customer for payment because you’re afraid that it would upset them? Worried they may take their business elsewhere?

You’ve given them all of the power in the relationship.

Do it once and they probably won’t notice, do it consistently and they’ll learn to take advantage of it to boost their own cash flow, then the fortunes of your business become tied to the whims of your customer.

If you let the invoices owed to you build up the chances of recovering the whole balance diminishes with time while the cost to your business increases.

When that customer decides to end the relationship, for whatever reason, you’ll most likely need a debt collector to help you get paid what you’re owed.

You Don’t Know What You don’t Know

You don’t know there’s another way to make sure you get paid on time.

And that’s OK.

Not everyone has heard of credit management or understands how it can protect the business’s cash flow and prevent it from spiralling into debt.

Many think it’s just about chasing for payment, but effective credit management, which is embedded throughout the whole ‘order to cash' cycle, can prevent late payment, reducing costs and increasing your working capital.

It’s the foundation for a constant and predictable cash flow from a stable base of customers that allows more efficient planning for future growth and capital expenditure.

If you need a debt collector, I can make a personal recommendation as I’m fortunate to count some as trusted colleagues and associates.

If you’re ready to explore how effective credit management processes could transform your business, then let's have a chat.

This article was first published on my website: www.confidentcashflow.com.