Collecting that cash

Unpaid invoices can cripple a small business, so what is the best strategy to ensure debtors toe the line? ISB speaks to an expert with four decades’ experience in the field.

It doesn’t matter how good your product or service may be, or how many customers you attract to your business, if nobody is paying your invoices you will soon run out of operating cash and find yourself in a big hole.

So, how can you collect the money that is rightfully yours, and do so in as short a timeframe as possible? Inside Small Business speaks to Roger Mendelson, a man with more than four decades of experience in this field as CEO of debt-recovery specialist Prushka, to find out how small businesses can manage their debtors’ list and, in so doing, maintain healthy cashflow…

Before we get into the processes themselves, how have you seen small businesses faring in comparison to their larger “cousins” in Prushka’s 41 years?

Our experience tells us that the larger the company, the worse its accounts in terms of the ease with which they can be reconciled. This can lead to “phantom income”, which results in the real position of a business being far worse than it appears.

Micro-businesses, on the other hand, which depend on day-to-day cashflow to keep their heads above water, have less data to reconcile so are more accurate in analysing their accounts. Their bookkeepers understand that if they don’t get it right, the business can go under very quickly.

That’s encouraging for the sector, but we still regularly hear about small businesses folding because of cashflow issues.

Absolutely. Every business, irrespective of size, has room for improvement in its collections strategy. Just a small tweak can mean a significantly better return. Unfortunately, time-poor small-business owners who are running every aspect of their company often cannot see simple improvements to the collections process that are fairly evident from the outside.

So how can small-business owners optimise their collecting procedures?

The set-up is all important. Be sure you double-check the exact spelling of the names of the business and key contacts of the companies you are issuing invoices to — both customers and those in the supply chain. If they are companies, ensure you record their ACN (Australian Company Number), and if they’re individuals, ascertain and record their date of birth, mobile phone number and email address.

The next step is to make your soon-to-be debtor aware of your trading terms. Every business needs to have a standard set of terms that are readily available to anyone with whom you will be trading — and they should always be published on your website, if you have one.

“It is fine to use emails as part of a collections strategy, but as soon as a debt is overdue an attempt to make direct contact with the debtor by phone is necessary.”

What should the terms of trade include?

The most important clause in your trading terms is one that reinforces the fact that if an account goes into default, the debtor will be liable for collection costs as well as the original debt itself. Without this, a business can end up out of pocket even if it eventually recovers the value of the invoice(s) that were in default.

It is also vital to carefully record any credit terms outside your standard ones that have been made for a specific customer (or set of customers), and make those special terms available to the relevant party. You might need to draw up special terms because of a higher volume of trade with a particular customer, or because you decide to offer less stringent terms to one or more parties you have been dealing with over a long period of time and know well.

What else should small-business owners do to tighten up their collections procedures?

However much work you have on and however small your business, you should always have one nominated staff member responsible for collections. I appreciate that small businesses don’t have the resources to have an AR (accounts receivable) team, and it may well be that the staff member nominated has work to do in other aspects of the business, but it is crucial that someone is clearly allocated for collections and that they are given the time to do it effectively. How much time this means depends on the size and state of your debtors ledger.

That staff member needs to have a simple reporting tool — usually in small businesses this is Excel — so the debtors’ position is clearly visible and any 90-day plus debts can be easily identified.

In my experience, too few businesses keep a close eye on their long-term debtors, and many do not give their appointed collections person the authority to take the steps necessary to recover debts.

So, all the important details about our customer have been recorded, our terms of trade have been set out, and we have a dedicated person to manage the debtors. How do we go about the collection process itself?

The number-one rule is to record every step and every contact. If an invoice goes into default and you have to initiate debt-recovery proceedings, being able to confirm what efforts were taken and when to recover the debt is integral to obtaining a successful outcome.

A phone call should always be made within a day or two of an invoice falling overdue. It is fine to use emails as part of a collections strategy, but as soon as a debt is overdue an attempt to make direct contact with the debtor by phone is necessary.

Often such a call will result in a promise of payment. A specific date of that payment needs to be obtained from the debtor. Often you’ll be told “within a few days”, “next week” or “soon”, but you should ask them for a more definitive answer — and note it on your records, If payment is not received on the specified day, a follow-up call should be made immediately. At this point you need to “up the ante”.

Is it not often a hard thing for a small-business owner who is reluctant to jeopardise the relationship with a customer?

That is indeed often the case, but in the best interests of the survival of your business you have to be tough. Bear in mind that although you need customers, bad ones have the potential to bring your business to its knees. For this reason, don’t be afraid of employing specialist help to deal with bad debts. Ideally, a debt should be referred to a collection agency as soon as it falls overdue. The later in the collection process an agency is employed, the more likely you’ll end up with a bad debt on your books than a collected debt in your bank account.

Roger Mendelson, CEO, Prushka

This article first appeared in issue 17 of the Inside Small Business quarterly magazine

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