August 2004

Information, close monitoring and quick action ... the key to reducing bad debts

Know who you are dealing with

Time and time again creditors seeking to recover a debt are frustrated by a lack of information obtained from the customer (now debtor) at the commencement of the relationship. Sales staff keen to make a sale can often overlook obtaining simple details from the customer which later on can lead to a debt becoming unrecoverable.

Whilst the credit management or receivables section of a business is usually well acquainted with the information that is required about a customer before pursuing payment for goods or services, the sales side of the business is quite often not so well informed. This can be a problem as frequently the sales department is responsible for recording the initial details at sale/order time.

It is vital at the early stage of the transaction that an understanding is obtained of just who the customer is. For example - is the customer an individual or a corporation? Quite often valuable services and/or goods are supplied on the basis of such vague details such as "Joe's Restaurant, Ground Floor, 10 Smith Street".

Standard questions should be asked and answers obtained such as:

  • Who is receiving the goods?

  • Is the recipient an individual or a corporation?

  • If an individual - their name, address, telephone and fax details

  • If a corporation? the ACN number and corporate name.

Prompt action will maximise your chance of recovery.

Remember a simple description like Joe's Restaurant may only be a trading name. Legal action to recover the debt at a later stage may be fatally flawed if there is uncertainty about who the customer was.

If your customers are reluctant to provide such details then that itself should probably start ringing some alarm bells. Your sales staff or the person assigned to taking orders should understand the basic difference between business names and corporations. A standard form should be prepared with a checklist outlining the information that needs to be obtained from the customer.

A good customer turned bad

A business relationship may continue for some years with no problems regarding payment. Suddenly a payment is missed, the customer's premises are abandoned and "Joe" is nowhere to be found with no hint as to where he has gone, or worse he denies that the debt is anything to do with him and there is no proper paperwork with which to make the connection.

Nightmare scenarios like this can be avoided by some simple information gathering at the start of the relationship and prior to delivery of any goods or provision of service.

A review of your current customer list, checking that you have these details is also a good idea. It may prevent a lot of financial pain in the future on the realisation that you did not know who your former well paying but now defaulting customer actually was.

It is also important that when details are changed by a customer they are verified in writing. For example when Joe Smith calls to say that the account should now be in the name of Joe's Restaurant, the same information as detailed above should be obtained.

Remember that the more information you have regarding your customer, the better, as these details become vital if it becomes necessary to recover a debt.

Key points for reducing bad debts

Many businesses, especially those involved in providing professional services (including lawyers) don't have effective strategies to avoid bad debts. Often simple monitoring of sales and payment will prevent many debt problems. These are some hints for reducing your bad debts:

  • Make terms of trade clear - In other words tell the customer when they have to pay. Make sure that at the start of the business relationship it is clear, preferably in writing when you want to be paid, for example on delivery, 14, 30 or 60 days. If it is made plain to the customer when they should pay, it is much easier to chase them quickly when they have failed to honour that agreement.

  • Make sure you always keep to the terms of trade - Don't let the customer flout the agreement to pay - chase the account as soon as it is overdue.

  • Review sudden increases in sales or business - If a customer suddenly increases their purchases from you, it is time to start to make discreet enquiries about the business. Unfortunately an increase in custom can sometimes mean that other creditors are refusing to deal with them.

  • Bill as soon as possible - Make sure you issue your bills as soon as possible. Customers' memories often fade quickly and frustration can arise when an invoice arrives a long time after the work is done or goods are supplied. Often funds that should have been set aside to pay your account have been spent.

  • No payment, no more work - If the customer is not paying then you shouldn't be doing any more work or supplying any more goods. This has practical as well as legal implications especially if later on the customer finds a real or imaginary fault with what you have provided or done for them and uses that as an excuse for not paying. The customer can argue that continuation to provide services was an implicit admission that the customer was well within their rights in not paying in the first place.

  • Watch out for shooting stars - These are new customers that undergo very rapid growth and suddenly your sales team is breaking all sorts of records in meeting that rapid growth. Often however, the star suddenly fizzes, sometimes into liquidation and you are left with a lot of unpaid accounts. Find out by making discreet enquiries if the star will be able to pay.

  • Money upfront - Many businesses operate successfully by collecting either all or a large amount of their fees upfront as soon as possible prior to providing the service or supplying the goods. This is especially beneficial for advisory/professional service based businesses. Customers' participation is often enhanced by the fact that money has already been outlayed on the work. Out of all the debt reduction strategies, payment up front is the most effective as it reduces later investigative work.

How to get the debt back once it turns bad

If after employing all these strategies, a customer slips through the net and fails to pay it is important to act promptly. A solicitor's letter of demand can often result in payment if various calls and reminder notices have failed. An indication that legal action will commence in 7 days will often move your account from the bottom to the top of the intray, which is really what credit management and debt recovery is about.

Sitting on accounts only gives the debtor time to dream up excuses for not paying you. In many cases the customer does not have any problem with what has been provided but through disorganisation or poor cash flow has decided to make you wait for your money.

If however there is a problem, a demand may result in some plain speaking about some element of dissatisfaction at an earlier stage prior to it becoming a potential claim against your business.

Conclusion

To minimise bad debts, obtaining information early in the relationship and implementing some simple rules can substantially reduce bad debts and reduce the time it takes for tardy customers to pay. Prompt action once the debt goes bad will maximise your chance of recovery.