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Minimising Late Payment Problems
This fact file looks at ways to minimise the problem of late payment.
1. Introduction
All too often the problem of late payment is just accepted as a fact of life. As long as measures are being taken to chase and pursue debtors managers feel comfortable that they are doing all they can to protect their cash flow.
This can be a waste of resources and will frequently damage relations with clients who may still represent good sales potential; despite the payment problems.
It is important to understand how to control credit and recover debts, but it is far better to take measure to avoid the problem in the first place. Plans for legislation to combat late payment problems are currently under consideration at both the UK and European levels; however business need to understand the individual needs of their customers in terms of invoicing and finance. Payment arrangements should be seen as part of the whole package of services the business offers to its customers.
2. Trade Credit
When a customer is allowed a period of time to pay for goods or services after they have been delivered, this is usually known as trade credit. Trade credit is not be confused with consumer credit, which concerns offering special credit facilities to the general public and is not covered in the fact sheet. Most industrial markets have a customary period before payment is made (usually around 30 days). This varies according to the type of business concerned.
Credit is allowed for a number of reasons. Some businessís see it as benefit to the customer and therefore a means to increase sales. Big businesses often demand credit because they have so much purchasing power. Often it is simply a convention of the trade that everyone follows.
Such conventions should be accepted on a routine basis if possible, credit limits should be set for each individual customer and reviewed regularly. Ideally, businesses should try to work on a cash delivery basis. This can make sales more difficult, but at least the business knows where it stands financially. For many businessís, a significant portion of company financial assets is tied to late payments.
Late payment is recognised as a problem in the economy as a whole, a vicious circle where everyone is trying to delay payment as long as possible in order to retain cash in their business. For the individual business it is also a problem that can quickly get out of hand if it is not tightly controlled.
3. The Customised Approach
It is a mistake to see credit control as a routine accounting function with standardised credit limits and set procedures to pursue debtors. Payment arrangements should be seen as one dimension of your companies complete customer service. Responsibility to maintain customer satisfaction lies with every person in the company.
i) Customer care
Be proactive about customer relations. Contact the customer before there is a problem. Have they received the goods? Is everything in order? Have they received the invoice? Has it been correctly made out? If everything is in order payment should follow naturally. The customer knows about you, and sees you as an ally, and hopefully will look forward to dealing with you again. If could only talk to them when there is a problem, customer relations can only deteriorate. Contact with the client should be controlled and consistent. Ideally, the person who agreed the initial deal should continue to be the main channel of communication to the customer, all staff should have a consistent approach to customer care.
ii) Quality Awareness
Many companies today find themselves in difficulties when a major customer refuses to pay on the grounds that an order does not meet the required specification. Fewer problems will arise in companies which use quality management techniques. More specifically, it is important that you can exactly define the quality that the customer expects if they are not to find fault with what you deliver. Make sure that this is defined in every detail and that you have it in writing with the customer. Do not undertake a job which demands a level of quality that you cannot realistically achieve.
iii) Maintain the Cash Flow Cycle
The overall aim should be to maintain the flow of the cycle of payment, especially at critical points such as delivery and i. If you could only call up your debtors you are spending time dealing with people who have already shown that they are reluctant to pay. You can only expect limited returns from such activity.
4. Agreements in Writing
Ensure, that once you have agreed a deal with a customer, you confirm it in writing. Obviously, if there is a legal dispute it is important to have evidence about the agreement or sale. But, on a more basic level, it is surprising how two people will come away from the same meeting with two totally different ideas about what was agreed. The majority of late payments derive from an unanswered customer question. Misunderstandings, even if they are serious, can delay payment. try to ensure that all the details of any agreement are summarised in a document. This will reduce the chances of a dispute arising and help you receive if it does.
5. Customising Payment Arrangements
Agree payments methods that best suit the client.
i) Credit limits should be agreed if possible for each client, and the terms should be reviewed on a regular basis.
ii) Can you offer a discount for prompt payments?
iii) Conversely be prepared to charge interest for late payment. Such penalties should be written into a clause in the contract. However, recent moves towards legislating for statutory interest on late payments have been met with the concern over the damage that this might do to customer relations. Collecting interest is often even harder than collecting the original sum and can ultimately lead to costly legal action.
iv) Try to establish form the outset whether the customer is likely to have any difficulties making the payment, particularly for large sums. Can payments be arranged in instalments?
v) Asking for a deposit is a good test of commitment to a customer, it establishes that they can pay, and can often off-set losses from bad debts.
6. Invoicing
Invoicing may seem straightforward, but a basic mistake can cause a major cash flow problem.
i)Invoice in the way that suits the customer, not your own administration. If the customer prefers invoicing in batches of a dozen rather than the units, do it their way. If they have to change their system to suit your invoice, payment could be delayed.
ii) Invoice immediately. If you delay, how can you expect the customer to pay promptly?
iii)Invoice correctly. the place to invoice may not be at the point of delivery. It may even be an entirely different company. Double check that all details are correct ( and legible) before you send the invoice out.
iv) Single item invoice. Payment for large quantities of items can be held up if the customer finds defects in only one part of the batch. One way to reduce this risk is to invoice for items singly or in smaller batches. This way payment will be delayed only for that part of the batch which is defective.
7. Useful Tips
i) A senior member of staff should review the overdue debtors list on at least a monthly basis.
ii) Although it is important to maintain customer goodwill, you should try to become adept at spotting potential bad debtors. A large amount of credit information and advice is available to assist you in this process.
iii) Do not take the late payment problems for granted. Look for the underlying reasons, inside and outside of the company, and try to address them correctly.
iv) Ensure that you have good way to obtain proof of delivery of all items are in good order, and that delivery is to the correct destination. Disputes about delivery delay payment.
8. Useful Addresses
Institute of Credit Management
Easton House
Easton-on-the-Hill
Stamford
Lincolnshire
PE9 3NHTel: (01780) 721 888
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