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Debtor System – Implement This Basic System to Massively Improve Your Cash Flow

Debtor System – Why bother to implement a process?

By following this Basic Debtor System you will;

  • Avoid cash flow pressures
  • Reduce your average Days Sales Outstanding (get paid quicker)
  • Less stress & free up wasted time

So it’s worth the effort, let’s get started

STEP 1:  Review and Reduce Terms & Conditions

  • No more end of month statements – they cost you time, money and resources and are not necessary.
  • Terms COD, 7 or 14 days, invoiced at the time of delivery (No matter the time of the month).
  • “A” grade customers may have 30 days if necessary
  • Remember – if a B, C or D grade customer is worried about terms, they are usually NOT worried about WHEN they have to pay rather HOW they are going to pay. If this is the case aren’t they a BAD credit risk?
  • Remember – Utilities such as phone, water etc. are pay on invoice only (not when statements are issued), and cut off your service if you don’t pay. People tend to try and pay these first, so why not be one of them?

STEP 2:  Choose the Team Member Responsible for the Debtor System Process

  • Stress the importance of the role and its necessity to be done as a continual process.
  • Promise to support them
  • Set targets

STEP 3:  Have a Clear “Aged Receivables” Report

  • Any good accounting software or trade designed software will have this function
  • This report will show the accounts overdue and by how much. Often they are defaulted at Current 0 – 30, 30 – 60 days, 60 – 90 days and greater than 90 days. Set the report to match your terms.
  • Have this report printed at LEAST weekly (if not daily) by the person responsible
  • Set targets. For example: over a period of time, how many accounts overdue in each category and the amount acceptable (obviously 0 is the target however, it takes time to reduce the list)

STEP 4:  Be Prepared

  • Have all the info you need. (Amounts, invoice numbers (or a copy of the invoice), contacts, notes from previous calls etc).
  • Make detailed notes of any conversations and promises (names, dates, times, what was promised etc.).
  • Pick a time daily or weekly for the calls to be made – block out the time. No interruptions

STEP 5:  Set Your Rules

  • Know exactly what to say:
    • Develop a script for each call
    • Develop a standard letter for sending after 3 calls.

STEP 6:  Set the Tone

Use the “3 F’s” – Firm, Fair & Friendly

  • Develop a script for each call, and a standard letter.
  • Don’t get into an emotional argument – stick to the facts.
  • If someone has a problem, take all the details and get the person responsible to sort it out ASAP.
  • If the customer becomes heated, rude or abusive, exit the call (sometimes this may even mean hanging up) and refer the problem to the Boss.
    • Your team members are not being paid to be abused – they are just doing a job.
      • The boss must ring up this person and challenge this person ASAP.
      • Insist on an apology to your team member.
    • You must support your Team.
    • To avoid this problem in the future you may need to change these particular customers’ terms to COD or choose not to deal with them at all.

STEP 7:  Follow the Contact Schedule

Consistency of contact is the key (the squeaky wheel gets the oil).

  • Do what you promise

STEP 8:  Don’t Avoid the Problem

Get on with it

  • Remember under contract law, at the time of sale they have agreed to pay for your product or service on the terms you specified. If they haven’t they have broken the contract.
  • Some clients may be under significant financial pressure either on a personal or business front. A payment solution may need to be arranged:
    • The client needs to admit they need help to pay.
    • The right blend of empathy and responsibility is needed.
    • Get the payment plan in writing and signed off by both parties.
    • It is better to help someone through and be paid than to alienate them and not be paid.
  • At a certain stage of the process (usually after the 3rd call) be prepared to put the customer on “Stop Supply”.
    • Enforce it!
    • Do not allow customers to rack up more debt if they are bad payers – teach them your way of doing business.
    • Note: it is surprising how many businesses will pay the bill when they need something.
    • Never tell the gatekeeper or the counter jockey they are on stop supply.
      • Always inform the owner or those responsible for accounts payable.
      • If more orders are placed with you, phone the person who placed the order and inform them you are unable to supply and they should talk to the Manager.

STEP 9:  Review your debtor system regularly

Regularly review the call sheets and identify businesses that are habitual bad payers.

    • Put them on COD (At least reduce their terms).
    • Choose NOT to deal with them.

Basic Debtor System – Client Contact Schedule
Debtor Collection Contact Schedule

Action Plan: – Debtors Contact Schedule

Call 1

  • 2 days after overdue (to allow for mail)
  • 80% of overdue debtors will be paid due to oversight or the fact you have rung.

Call 2

  • 1 week after 1st call (9 days overdue).
  • This call is important in that it shows you are on the ball and not going away.
  • Always go over what was said in the previous call and what they promised to do (This puts you in control, and the customer feeling guilty for being caught out).

Call 3

  • 1 week after 2nd call (16 days overdue), or no later than 2 days after they promised an action (e.g. I will do a bank transfer tonight).
  • Put them on “stop supply” if necessary and inform them it will be lifted as soon as payment is received.
  • Always go over what was said in the previous calls and what they promised to do (This puts you in control, and the customer feeling guilty for being caught out).
  • Ask if there is any problem with the payment.
    • Bring any problems to a head and also challenges them not to lie.
    • If there is a problem refer to the Boss re a payment plan.

Letter To Client

  • 1 week after 3rd call.
  • Outline contacts and failure of commitments made on previous dates.
  • Stress they already are on “stop supply”.
  • State that if payment is not made or if you have not heard from them by a certain date, the matter will be passed to your debt collection agency.
    • Allow time for post, weekends, and a few days to organise themselves.

Send Matter to Debt Collection

  • If by this stage they have failed to deliver on promises and failed to react to the letter, resolve the matter – don’t mess around anymore
  • It is better to get 80% of what your owed now rather than 0% never – at least you can cover for your costs and keep the cash flowing forward.
  • Some Debt Collecting agencies add their fees to the amount so you are not out of pocket.

Once at this stage, the matter is resolved and not a source of lingering annoyance for the owner – a real source of stress.

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About David

I'm David Bater this is where my team and I publish insights, tips, and best practices in Growing a Business. My goal is to help YOU find the Time to Grow Your Business and Increase Profits. By sharing with you my knowledge, experience (both good and bad) and wisdom gleaned from 30 years of buying building and selling businesses. Read more about me and this website →

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  1. Financial Ratios = Healthy Business - David Bater - September 10, 2013

    […] Debtor Days Ratio indicates how well accounts receivable are being collected. If receivables are not collected reasonably in accordance with your terms, then should rethink your collection process or train your team.  (There is a short guide to increasing cash flow through implementing a debtor collection system here) […]

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