Cape Town - There are a few simple disciplines and procedures that smaller businesses can implement to combat bad debt.
The first procedure - clarify payment instructions. A debtor loses interest in a matter fairly quickly once the service or product has been delivered.
If there is the slightest lack of clarity about the due date for payment, the amount, or the method of payment, he would rather do nothing than clear up that uncertainty.
Lack of clarity does not necessarily arise from something the business has done. It is generally the debtor who has misplaced the account or forgotten when it is due or how much he in fact owes.
Firms need to institute a clear procedure that ensures that the terms and conditions of payment are crystal clear.
Although most providers include these aspects in a standard contract, it is much more efficient to explain them by word of mouth as well, together with a strongly worded notice at the time of delivery (where possible or practicable).
A good example would be a receptionist at a doctor's consulting room, who informs the patient that he will receive the account as soon as the consultation is over. She must inform the patient that he must pay the money owing into the bank account indicated on the invoice by month-end, and he must confirm that the amount on the account is correct.
Create a follow-up routine. The biggest problem is not to manage debtors, but rather to manage the staff in charge of debt.
To do so, there needs to be a prescribed routine or protocol to follow.
The practical method is to divide the debt cycle into stages. First, there is the procedure before the service is delivered. Second is the action after the service is delivered, but before payment is made. Third is what is done in default of payment. Fourth is the handing over to a debt collector.
The following example illustrates the steps. Before providing the service, ensure that the service contract is signed, give clear instructions for payment, make sure that the contract details are complete and send an SMS or e-mail with bank details.
After the service has been rendered, but before payment is made: enter the due date for payment in a diary and send an SMS to the client to remind him of the payment.
Action when payment has not been made: telephone the debtor as soon as he is in arrears; also send an SMS. Send a letter of demand within two days. Send a strongly worded letter within seven days.
Diary systems. The innocent phrase "pay within 30 days of receipt of invoice" (or sometimes after delivery of the service), or any variation on this theme, can have unanticipated consequences.
In the first place this generally implies 30 ordinary days. Payments to the business can therefore be made on any day of the month.
Secondly, if a business does an analysis of its debtors at month-end, that month's invoices would by definition not yet be due, and the next month's accounts would in most cases already be overdue. Thus always too early or too late.
To overcome this problem businesses can follow up on their outstanding accounts every day.
Should a debtor be five minutes later than agreed in paying, he must be followed up. The general practice of checking debtors on a monthly basis has a negative effect on credit management, because by definition debtors are being followed up too long after breach of contract.
A proper diary system clears up this problem in no time at all. A smallish business with few debtors can successfully manage it credit environment with a handwritten diary.
As volumes increase it becomes necessary to enlist electronic help, whether by means of a database solution or a follow-up list extracted from the financial system. The most elegant solution, although expensive, is to acquire a debt-collection system that records all follow-up actions and implements them.
In the end a business should check its debtors and determine the arrears day by day. This can all be done via the diary.
Thorough bookkeeping. As mentioned above, debtors quickly realise if a business is well organised. For that reason all dealings must be comprehensively recorded.
For example, check carefully if a debtor claims that he negotiated discount with a previous bookkeeper, or favourable payment conditions, or if the debtor's former spouse can be held accountable.
*Du Plessis is the head of Duvesco, a debt-management firm.
- Sake24.com
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