Hi, my name is Adam Stewart, Debt Collection Expert and owner of ADC Legal Litigation Lawyers.
One of the reasons why I enjoy my job is I get the chance to help my clients manage their accounts receivables a little better and provide some guidelines on how to avoid bad debt.
Late payments and bad debt are two of the biggest problems that businesses face on a regular basis. Poor credit management can result in cash flow issues, which will seriously harm the performance of any business, large or small. Credit management may seem like a simple task that involves reacting to customers, but by taking a proactive approach, you can actually eliminate many of the problems associated with late payment and bad debt.
Chasing debts can be difficult and sometimes an impossible job for any credit department. Aside from being time consuming, the problems associated with late payment and writing off bad debt can be crippling in the end. Taking a proactive credit management approach will see you avoid many of these difficulties.
You may remember my Debt Recoveries Australia blog from last year, in which I shared ways to reduce over 30-day accounts or prevent them from happening.
Here are some more tips, relating to ways to avoid bad debt and better manage your accounts receivables:
1. Choose your clients carefully.
I know your sales department will be putting pressure on you, the Credit Manager, to accept as many clients as you can, as quickly as possible. However, you need to be careful in choosing which clients with whom you are going to do business.
Putting in place a detailed credit application process will allow you to gain important information from prospective and existing customers before you extend them a line of credit. If a company is reluctant to provide you this information then this is already a red flag. Try to get a personal guarantee from the Director or Trustee, if you are dealing with companies or trusts.
The more selective you are about whom you do business with, the fewer problems you will have with debt collections. It really is that simple. Review and assess as much information as you can and try to obtain trade references for information about payment history, buying trends and past disputes. Engaging with your customer to learn more about them is a great way of understanding more about their business, how they work and their expectations of you as the supplier.
It is also important to remember that you can review any accounts anytime and don’t be afraid to make adjustments to the current agreements. This proactive approach will prevent you having problems in the future.
2. Build a relationship with your client.
I like to ring each of my clients once a month, just to be in contact and make sure all is going well and if they need anything from me. I also like to visit them face to face at least once every 6 months.
One of the key benefits of this approach is you are building and developing a more positive relationship with your clients. Try not to make a nuisance of yourself- it is a fine line!
It is not great business if you only contact your client when payment is late. This automatically creates a bad feeling between the two parties. By being proactive, both sides can identify potential issues much earlier in the process, which leads to collaborative working before a serious problem arises.
3. Call or email your client before due date.
Waiting until customers have past due invoice dates is the typical approach that credit management departments will take. Mitigating credit risk from the start will enable you to better manage your accounts and prevent cash flow problems in the future.
Previously, my big tip was simply to “be pro-active”. Following on from this, my suggestion is follow up your invoice before it is actually due. Send a friendly reminder about payment, giving a gentle hint at the due date and the consequences of late payment. Set this up as an automated process, using your own software, or something like Xero, Debtor Daddy or Debt Chaser. This will hopefully result in a proactive conversation with your clients.
4. Document all credit and collection activities.
Set up systems and processes so that you can document and keep track of your credit management. This is a good strategy to avoid bad debt.
All credit and collection activities should be well documented in a centralized location or database. It is good business practice to ensure that phone conversations, emails, disputes, account notes, and other important data are documented and available to authorized employees.
5. Outsource to a Debt Collection Professional.
What do you when a client is facing bankruptcy or simply refuses to pay an invoice due a dispute or cash flow problems? In these situations, it is necessary to ask for the help of a debt collection professional.
When this happens, credit managers need tools to identify troubled accounts and guidelines such as time and/or debt amount so it can be escalated to a debt collection professional quickly.
If you want to find out more details on how a debt collection professional can help you with manage accounts receivables and avoid bad debt, you may also email me at ADC Legal Litigation Lawyers can also help, call 1300 799 820. You may also us at firstname.lastname@example.org or Skype at adclegal.