Debt collection and recovery is an essential component of any business plan. While it’s not much fun to think about, the reality is that lots of businesses will encounter late or non-payment from clients at some stage. In this article, we’ll run you through some key strategies for preparing your business to make sure your cash flow is protected.
We’ll start by looking at why having a plan is so important, followed by our top tips for ensuring easy fuss-free payment from your clients. We’ve also included our step by step guide to efficient and effective debt recovery.
Why having a Payment Recovery Strategy is Important for your Business
A business without a plan for managing debt collection and recovery is at risk of interrupting normal business practices and experiencing a wide range of negative outcomes. Here are a few of the reasons you may not have thought of that highlight why the timely collection is important:
Protect your Own Time and Resources
Chasing payments takes time. Tracking what’s due, following up on payment plans, discussing possible further action: if you’re a business owner all of these things happen on your dime. When all’s said and done, you don’t want your accounts team – or your own time – being taken up with chasing debtors.
Things Shift Quickly in Business
You don’t need us to tell you that things can shift quickly in business. Much-needed equipment can break down, employee costs can fluctuate, bills and expenses can be unpredictable. It’s important to be prepared – and to be able to free up your cash when you need to. If you don’t secure your earnings you risk leaving yourself exposed and without access to money when you need it.
Positive Cash Flow
It seems obvious, but timely account collection is critical for positive cash flow. Positive cash flow is simply having more money coming in than going out. Regardless of what work you do or what industry you’re in, this is the whole reason you’re in business. Being lax about your collection processes can have a significant impact; it can impact the value of your business on paper, your borrowing power should you need to apply for a loan, and your ability to achieve what you want to. Without the right money coming in, your whole business can quickly shift into uncomfortable territory.
All these are very good reasons why we recommend having a clear plan in place both to streamline your debt collection and recovery processes
Protect Yourself: Getting Ahead of the Problem
One of the best ways to avoid late payments is to get ahead of the problem. This involves having a well-established, airtight system that makes it easy for your clients to pay on time and easy for you to follow up if they’re late.
Top tips to help protect your business before a problem occurs:
- Consider your invoicing practices and ask yourself these simple questions:
- Do you need to tighten your timeframes by shortening your payment terms?
- Should you be requesting an upfront payment? Depending on your industry and your overheads, this is sensible to consider (particularly with new clients). If you’re not sure, perhaps consider introducing a practice of invoicing 50% upfront and 50% on delivery of your product or service.
- Do you need to investigate your new clients before commencing business with them? This is becoming a more common practice and can be a good way to protect your business from those with bad payment practices. Companies such as Dunn and Bradstreet or Equifax can undertake credit checks and provide informative, comprehensive reports.
Here are a few other pointers to help ensure you’re using best practice when it comes to invoicing:
- When commencing with a new client, make sure you take comprehensive contact details so that you have a record of their full name, business name, best contact phone number, and best email. This makes any follow up processes much more straightforward.
- Make a point of providing your invoices in a timely manner. Rather than waiting until the end of the month, make it your practice to provide an invoice either on the spot once work is completed, or within forty-eight hours of completion. This tightens timelines and makes it harder for your invoice to fall off your client’s radar.
- Streamline your clients’ payment experience as much as possible. Think about what would make the payment process easiest for them. Shifting to paperless invoicing can help make invoices easily trackable for both parties. Perhaps consider investing in portable EFTPOS machines to make instant payments possible if that’s relevant to your business.
- Know when to contact a professional debt collection service for support. This is perhaps one of the most critical things to get right. Bringing in the experts can streamline the process for you so that you see your money faster. More than that, it can also take the stress out of what can be a difficult situation. Make sure you choose a reliable and trustworthy debt-collection company so that you know they can manage the situation well and be an expert at preserving your business relationships wherever possible.
Strategies for Managing Debt Collection: Our Step by Step Guide
As we’ve already outlined, every business needs to have a clear plan to manage late or missing payments. Don’t just guess your way through it!
Here’s our step by step guide to help you:
Step 1: Send a friendly payment reminder
In many cases, late payment is simply the result of oversight rather than anything more serious. However, a prompt reminder is an important step in making sure you recover payment quickly and easily. Make sure your communication is courteous and professional, but assertive.
Step 2: Give a follow-up reminder
Use your judgment as to the best way to contact for this follow-up reminder. It may be the case that they need a phone call to prompt them to make payment.
Step 3: Send a final notice
Let them know that payment is beyond due and is required immediately. Outline your previous attempts to finalise the outstanding amounts and remind them of your payment terms.
Advise them that follow up action may be required if payment isn’t made straight away.
Step 4: A letter of demand
A formal letter of demand is an official notification that if payment isn’t made the debt will be handed on to a collection agency. Always remaining professional and clear in your communication, give them an understanding of the seriousness of the situation and acknowledge your previous attempts to resolve the outstanding debt.
Step 5: Engage a reputable debt collection agency
If these measures fail, it’s time to engage an expert debt collection agency to handle the debt recovery from here. While this may seem difficult, it will save you time in the end and will help to avoid things escalating and creating legal issues. Before engaging an agency, make sure you do a thorough check and ensure you’re engaging a well-established and well-regarded agency that you know you can rely on.
Properly managing debt recovery is an important part of any successful business. After all, protecting your cash flow is critical to your business’ growth. Support your clients to pay easily and on time with our guide to invoicing best practice and use our step by step strategies for debt recovery to maximise your chances of quickly recovering late payments.
If late and non-payments are becoming a problem for your cash flow, it’s time to engage a professional debt collection partner. Expert debt collection agencies will streamline your collection processes leaving you free to spend your time building your business, not chasing payments.
Richard Scott is a passionate finance writer and business coach who spends his time helping small businesses to eliminate debt and implement cash flow positive collection processes.