Cash Flow Management

How to run your debt collection department effectively

• Get Close to the Customer
• Make 'Credit Terms' very clear
• Terms of Trade
• On Invoices and Statements
• Open New Accounts Properly
• Invoice effectively
• Achieve Adequate Collection Coverage
• Set Targets and Priorities
• Use Third Parties Sooner not Later
• What if your clients will not pay?
• Ways to make customers pay
• Late Payment of Commercial Debts [Interest] Act 1998

• The Few Major Accounts
  Good credit agency reports can indicate the right level of credit. Businesses can get to know customers' payments staff by visiting them at intervals. Cultivate them to get priority treatment - as they would buyers. Give them priority attention on queries and service.
  
  
• The Mass of Non-major Accounts
  Businesses must ensure they have the right individual's name for letters and phone calls, perhaps from credit application forms or routine correspondence.

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• In a Sales Negotiation
  It is professional, not anti-selling, to say 'our business allows 30 days to pay - does that give you any problems?'. Discuss it, don't duck it.
  
  
• On an Order Acknowledgement
  Stress 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 stated payment terms and conditions of sale.

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Terms of Trade, also known as Conditions of Sale or Terms and Conditions, are designed to protect the seller's rights, to limit potential liabilities and provide some degree of security for the recovery of the debt, following the supply of goods or services.

Equally, the seller will have his/her own terms. What is essential is that both contracting parties (i.e. buyer and seller) agree Terms of Trade between them before, or at the time that a contract is made. This will set the ground rules between the contracting parties. It will mean that both parties know exactly what is expected of them and may prevent unnecessary disputes.

A good time to agree Terms is when the seller has had their credit facility letter formally accepted by the customer.

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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 required by 14th March 200X'.

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

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1. Credit Application Form: - obtain correct name, payment address, person for payments, phone, fax numbers,e-mail details and acceptance of terms. (See form below)
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 'welcome letter' to make contact with payments person, stating how and where payment should be made.
5. Now the business is ready to sell to the customer on a credit basis, use special ledger category for 3 months, with telephone contact, to get the customer into good payment habits.
   

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• An attention-grabbing invoice should be designed.
• It should be 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.
• 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.
• Customers cannot be expected to pay against incorrect invoices. Invoices must be accurate.
  

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• As most businesses know, customers generally pay on time when chased, or when presented with alternatives, which may include court action.
• The sellers must find time to know which is which and deal with them accordingly.
• Collection methods you might suggest include: VISIT - PHONE - LETTER - FAX. A Stop-List can also be effective for products in short supply.
• Suggest visiting 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.
• Suggest the business establishes telephone correspondence with major accounts in advance of due dates to ensure payments are in process, in time to solve problems before the deadline. It may be worth them phoning all other accounts, working down the list by size of debt, according to time available. LARGE DEBTS SHOULD BE PURSUED BEFORE TELEPHONING SMALL DEBTS. Working in alphabetical or account number order is dangerous
• Suggest written correspondence 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.

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• Policy: - the company boss should make it clear to all relevant staff that THE COMPANY IS IN BUSINESS 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 - RESOURCES ARE 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.
  

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Despite best efforts by businesses to implement credit management policies and efficient collection methods, some customers just will not pay up.

Getting a county court judgment can be the easy part. For further information go to www.courtservice.gov.uk , where in the Forms and Leaflets section you will find a section on Small Businesses and Commercial Debt, where useful leaflets can be downloaded.

Sadly, some businesses find that despite going to the expense of winning a judgement, the debtor still refuses to acknowledge calls or letters.

It is advisable to check the credit worthiness of the debtor, since non-payment could be an indication of financial difficulty. if the debtor cannot afford the payment there would appear to be little point in incurring further costs chasing the debt.

The creditor could take enforcement proceedings, they offer no guarantees however.

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i). Oral Examination
Oral Examination. This is an application to court (costing £40.00) for the debtor to be summoned to court to be examined on oath as to the financial means of the company.

The best person to make the application against would be the person in the company having responsibility and knowledge of the finances.

Failure to attend the examination can lead to imprisonment for contempt.

The difficulty for the creditor is in determining whether the debtor is being truthful.

The information obtained can be used to determine the most suitable method of enforcement or whether its even worth the"powder and shot".

ii). Statutory Demand
A creditor could serve a Statutory Demand on the company. This is a precursor to Winding Up proceedings (suitable if the debt is £750.00 or more). If the company is solvent, this is more likely to result payment as it is unlikely that the company will wish to be wound up is it is solvent.

Failure to comply with a Statutory Demand is an automatic ground for winding up so if this does not bring about payment, it's likely the company is insolvent in which case it's probably not worth wasting the money and issuing winding up proceedings.

A statutory demand is free, save for the cost of preparation. Most Solicitors will have a preprepared form which they will simply fill in.

Technically, it should be served personally, not by post.

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In November 1998, the UK Government introduced legislation to give businesses a statutory right to claim interest from other businesses for the late payment of commercial debt. The UK was one of the first countries in the EU to introduce late payment legislation to help promote a culture of prompt payment.

Amended late payment legislation will come into force in the UK on 7 August 2002 which will fulfill the UK’s obligations under the EC Directive on late payment and bring additional benefits to businesses. Your rights and how the changes to the late payment legislation will affect them

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