Chapter 20

Ten Tricks for Collecting Money

In This Chapter

Knowing and loving your credit policy

Chasing money without delay

Getting on the phone and letting those debtors know you care

Tracking every call made, every promise received

Following through on your threats

One of the trickier jobs that often falls to a bookkeeper is chasing money from overdue accounts. If you don’t have an outgoing personality or you’re not naturally an assertive person, the process of phoning people up and demanding money can feel like something akin to torture.

This reticence quickly turns into a negative cycle, because the longer you leave a debt before you chase it, the more likely it is that the debtor won’t pay. The secret to getting paid is to have clear credit terms and make contact with customers the moment they go beyond these.

I can’t cure any innate shyness you may have, but in this chapter, I do provide a lot of tricks about how to chase money. Good luck!

Draw Up a Credit Policy

If you’re charged with chasing money from customers, you want to have a set of rules that outlines the deal for any customer who receives credit. This document is called a credit policy and, if such a policy doesn’t yet exist, it may be your job to ensure the business has an effective credit policy in place.

The kinds of things that go in a credit policy depend on the business, but usually include

• What’s the fine print on the credit application? All customers who receive credit must complete a credit application. Make sure this application includes full contact details for the business owners and at least two credit or trade references.
• What are the trading terms you offer to customers? You may be wise to tailor your trading terms to different customers. For example, if you sell to any of the large retail chains, you’ll get hammered for generous terms and hideous discounts. However, you can still stick to offering 7-day or 14-day terms to the rest of your customer base.
• How often do you send customer statements? I suggest you send customer statements monthly if you offer 30-day terms, or fortnightly if you offer 7- or 14-day terms.
• How soon do you chase customers for money after a bill falls due? I talk about this topic more in the section ‘Don’t Waste a Moment’.
• At what point does a debt go to a collection agency or other legal action? This crunch point varies from business to business. Make sure the policy also outlines if you need approval before initiating legal action.
• What are the goals in terms of debt collection and accounts receivable ratios? A good credit policy should include goals, so that a bookkeeper knows what to aim for. For example, a goal could be to have an average collection time of 45 days, or to have less than 2 per cent of the total debts outstanding in 90 days or more.

Do Your Homework

Just asking a customer to complete a credit application isn’t enough. Take the time once you receive the application to perform a thorough background check. Phone the suppliers that the prospective customer provides as references and ask whether the customer usually pays on time, how much they spend each month, and whether the supplier is aware of any cashflow problems this customer may have.

Do stay alert for the customer who is asking for significant credit but provides references for accounts where they only spend $100 or so per month. (Even a business on the brink of insolvency can often manage to keep at least one or two suppliers paid on time, especially if the amount of the account is very small.)

Next, set a customer credit limit that makes sense for you. The value of this limit very much depends on your business. For example, if you’re turning over $5 million per year, you may be comfortable offering a particular customer credit of $50,000. However, if you’re only turning over $100,000 per year, this level of credit is probably unthinkable.

If you’re at all unsure about a customer, consider offering COD terms only for the first few transactions, set a low credit limit, or insist upon 7-day trading terms until the relationship is more established.

Don’t Waste a Moment

When a customer’s account runs overdue, get on the phone straightaway. By overdue, I’m not talking about 60 days or 90 days. Start chasing as soon as an account is seven days overdue. The longer you leave a debt before chasing it, the more risk you run of not getting paid.

Dun & Bradstreet, one of the world’s most respected organisations specialising in risk and debt collection, offers the following statistics as motivation for acting promptly:

• For debts that are one month overdue, an average of 6.2 per cent never pay.
• For debts that are three months overdue, an average of 26.4 per cent never pay.
• For debts that are six months overdue, an average of 42.2 per cent never pay.

In other words, your chances of getting paid fall dramatically every month you wait before initiating the debt collection process. So don’t be soft, don’t be nice, and don’t waste a single moment …

Calculate the Cost of Debts

Sometimes I come across business owners who begrudge the bookkeeper the time they spend chasing debts. This always surprises me, because not only does the business risk increased bad debts the longer they wait before chasing money, but slow-paying customers also tie up valuable capital.

If you — or the business owner — have trouble getting fired up about the idea of debt collection, think of it this way: Imagine your monthly sales are $30,000 and customers pay on average in 60 days. If you can reduce this average from 60 days to 45 days, you generate an extra $15,000 of working capital for your business, interest free!

Get on the Blower

When chasing overdue accounts, I find phone calls work infinitely better than a pile of reminder letters or emails. Over the years I’ve refined my telephone technique down to a fine art, so here are a few tips, straight from the horse’s mouth:

• Be polite, cheerful and warm: Get to know the person(s) responsible for accounts by their first name and make sure they know who you are too. Ask about their family, their holidays — build rapport. (Being friendly is a great way to elicit guilt.)
• Aim high: Don’t beat about the bush. Start by asking whether the payment will be sent immediately. If the answer is ‘no’, ask why not. Let the person talk, and don’t interrupt them.
• Have all the information at your fingertips: Before you call, be sure you can tell the customer the exact amount they owe, what they purchased, the due date for each invoice, and the total amount of all invoices outstanding (even ones that aren’t due yet).
• Know what kind of payer you’re dealing with: Again before you call, have a quick look at this customer’s payment record. Does this customer usually pay on time or do you usually have to hound them? Are payments getting slower and slower?
• Offer solutions: If someone genuinely can’t pay immediately, don’t wait for them to tell you when they can pay, but instead provide a solution. Start by saying something like ‘how about 50 per cent this week and the balance in 14 days?’ If the customer rejects this solution, have another (gentler) solution up your sleeve that you can suggest instead.
• Don’t be fobbed off by excuses: If a customer has lost the invoice, email or fax them a copy within the hour. If the invoice ‘is delayed in the system’ ask the accounts person to investigate what stage the invoice is up to. Say you’re going to call back the next day.
• Ask for a commitment: When somebody makes a vague comment such as, ‘I’ll be paying that bill next week’, or ‘I’ll attend to your account as soon as possible’, reply by saying: ‘Thanks so much for that. Does this mean I can expect a payment by such-and-such a date?’ If the customer agrees, confirm their response by saying: ‘That’s great. I’m writing in my diary to expect your payment by (say) 31 March. If I don’t receive your payment by 1 April, I’ll phone again to check there are no problems.’
• Confirm commitments in writing: If someone promises to pay by a certain date, send an email as soon as you hang up the phone thanking them for this commitment, and confirming the agreement they have just made.

The squeaky wheel gets the grease!

Don’t Give Too Many Options

If a customer is overdue with their account, avoid giving too many options when you chase money. For example, if you send reminders, don’t ask that customers settle their accounts within 14 days. Instead, simply ask for immediate payment. After all, the customer is already overdue — why cut them any more slack?

Similarly, customise your statement format so that instead of having Current, 30 days, 60 days, 90 days and even 120 days-plus as totals on the bottom of the statement, simply have two totals: Current and Overdue. You don’t want to be sending the message that it’s okay, or even possible, for someone to go 120 days over on their account.

Keep a Dossier

Keep track of every phone call made, every reminder sent and every promise received. Sometimes it takes months, numerous phone calls and many emails or letters before you succeed in getting someone to pay, and if you repeat this process with a lot of debtors, you soon lose track of who promised what.

How you log this activity depends on what systems you’re using. If the accounting software permits, I like attaching notes to a customer contact log that not only documents all activity, but also allows me to flag recontact dates. This function means that if a customer promises to pay by a certain date, I can note this date in the log, and then the software prompts me when this date rolls around.

An alternative is to maintain notes in a spreadsheet such as Excel. The flexibility of a spreadsheet means you can put notes in any format, but still be able to search or sort by customer name, amount or recontact date.

Track ’em Down

What if you’re chasing a debt and the customer isn’t answering the phone, or the letters you send get returned? You may need to don your Sherlock Holmes hat and do some creative tracking:

• Search online: You can often find people simply by Googling their name. If this tactic doesn’t work, try the white pages online at www.whitepages.com.au or www.whitepages.co.nz.
• Use a professional: If you have a relationship with a debt collection agency, you can request a Credit Reference report. Some agencies even provide a tracing service for ‘lost debtors’.
• Try local connections: If you know that a debtor was living in rented premises, phone the local real estate agent and ask if they know where this person moved to. Alternatively, go to the street where that person lived, and knock on the neighbours’ doors. (Just remember not to tell the neighbours why you’re trying to find this person — otherwise, you may fall foul of privacy laws.)
• Contact the references on the initial credit application: If you received a credit application from this debtor, check out the credit or trade references they supplied, and see if these people or companies know where this person is now.

Stick to the Law

Although I encourage you to be assertive and forthright when chasing money, you must be careful never to be rude, nor to chase money in a way that could be described as harassment. Here are some guidelines about where assertiveness ends and harassment begins:

• Don’t phone debtors on a public holiday or after 9 pm at night.
• Never contravene privacy laws. If you can’t get through to the person who owes you money, it’s okay to leave a message saying that you called, but you mustn’t say what your call is concerning.
• Don’t make contact more than three times per week, or more than ten times per month. Contact includes speaking to the debtor (including if the debtor hangs up), letters, text messages, telephone messages or emails.
• Leave a reasonable amount of time between making each contact.
• If you’re considering visiting the debtor’s home, first seek advice from your lawyer regarding privacy and consumer protection laws.
• Never make any kind of physical threat.
• Don’t make idle claims in your correspondence. For example, don’t say ‘numerous attempts have been made to contact you’ if this isn’t the case, and don’t say ’you will be liable for collection charges and fees’ if that isn’t true.

For a more detailed summary about the rights and responsibilities of a debt collector, visit the ACCC website at www.accc.gov.au and download the free publication ‘Debt collection guideline: for collectors and creditors’, a joint publication by ACCC and ASIC. Or, in New Zealand, visit www.consumeraffairs.govt.nz.

Get Drastic

You may have been reading through all my debt-collection tips, thinking to yourself, She’s optimistic. None of those strategies would work with so-and-so. I agree. Some people are professional payment-avoiders. They know how to take you right to your limit and maybe beyond, and are quite content in the knowledge that some of their suppliers are likely to give up along the way, letting them get off, scot-free.

So here’s my strategy for getting blood out of the proverbial stone:

1. Do all the basic stuff first.

   Don’t go in heavy straightaway, or you may lose a customer. Send statements, make phone calls and send at least one reminder email or letter. Be prepared to accept repayments in two or three instalments, if that helps.

2. Decide what action you’re prepared to take.

   You may need to discuss with management how far they’re prepared to take this matter. In warning a customer of what may occur, for example, do you intend to issue a summons at the local court, or to refer this debt to a collection agency such as D&B (visit www.dnb.com.au for more details)?

3. Send a final warning, asking for immediate payment, and explaining what action you intend to take if payment isn’t received.

   This warning is known as a letter of demand and usually says something like ‘We advise that if payment is not received within seven days of the date of this letter, we will instruct our debt collection agency (or solicitor) to issue proceedings against you to recover the unpaid debt together with our legal costs.’

   I suggest that you send letters of demand by registered post, so that there can be no doubt that this letter gets to its destination. Don’t put your business name on the outside of the envelope (this avoids the syndrome of the debtor seeing the envelope, thinking, ‘Oh no, not them again’, and turfing the envelope in the bin without even opening it).

4. If the debtor doesn’t respond to your letter of demand, take the next step.

   Whatever you threaten, you must be prepared to follow it through. If you threaten to take legal action, send the lawyer’s letter within a fortnight. If you threaten to cut off supply, do so.

And, on this rather sombre note, this chapter comes to an end. (What did you expect? A chapter about debt collection was never going to be all fun and games.)