The golden rule in business is to collect money owed to you faster than you have to pay out money you owe to others (such as suppliers). The unwillingness or inability to collect money can easily lead to a cashflow crisis. This guide offers some tips on effective methods of debt collection.
Most businesses tend to avoid or delay prompt debt collection for two main reasons. First, they find the process of chasing debtors unpleasant. Second, businesses (especially new businesses) often become so involved in daily business activities that debt collection is put on the backburner, or simply neglected in the hope that people will eventually pay.
The best way to avoid debtor problems is to establish efficient systems and follow set procedures. For help in this regard, see the related Solution Guide, ‘Five steps to make sure you get paid’. It also explains shortening the payment cycle by tightening your terms of trade.
Despite your best efforts, there are likely to be occasions where you have to chase debtors. Here are some tips to help you.
Age of the debt
Your chances of recovering a debt are directly linked to the age of the debt. The longer the debt goes unpaid, the less chance you have of recovering it. Your best debt recovery strategy, therefore, is to get on top of unpaid invoices as early as possible and chase them up.
Avoiding large debts
A process that allows you to identify problem customers early will enable you to cut off further credit until bills are settled.
If you don’t have an effective system in place for monitoring unpaid invoices or late payments, it is quite possible for a customer to order more goods or services from you. Keeping your problems manageably small reduces your risk and total debt exposure.
Collecting your money
In order of effectiveness, the three most common ways collecting debts are:
- Personal visits
- Telephone calls
- Letters and reminders