Smell that? It’s the seasonal bouquet of spring time, bringing with it the perfume of blooming flowers, the earthy fragrance after rain, and the heady odour of freshly cut grass. It also brings with it the smell of opportunity.
Spring heralds the fact that Christmas is around the corner, and it’s the time of year when you need to have capital available to buy more stock, pay seasonal workers’ wages, and build up cash reserves before companies shut down for the holidays and recovering debts becomes much harder.
With one in two Australian businesses owed more than $20,000 on overdue invoices, putting effort into this area can make a material difference to your business’ bottom line.
Unclogging cash flow entails taking stock of all of the overdue invoices, organising them by due date, and then tackling them one by one – with the oldest invoices receiving your immediate attention.
Remember: as an invoice ages, the cash becomes harder to recover, and the probability of making a collection decreases
As part of this debt spring clean, you’ll need to prepare a log of all previous communications undertaken with each client in relation to the debt. This includes the date they received the first bill, who it was addressed to, and any subsequent interactions.
An audit trail of communications will help you counter the top two debtor excuses: “I never got your invoice” and “You should have reminded me to pay.”
Each debt needs to be dealt with on a case by case basis. Generally, using different forms of communication as the debt ages is the recommended course of action.
Start with an email reminder two weeks after the invoice due date, with copies of the overdue invoices attached, and give your customer a reasonable time to respond. At this stage, you might agree on a payment plan if your customer is experiencing cash flow problems.
If that doesn’t bear any fruit, follow up with a text message one to two weeks later (SMSes have a very high read rate). Otherwise, email a second payment reminder. Even better if debtors can click on a ‘Pay Now’ button from your invoice or reminder, as it removes friction from the process and enables them to settle the bill instantly.
Two reminders should be plenty in terms of flushing out payment, but if the money still hasn’t landed in your bank account, it’s time to work the phones.
If you’ve been dealing with a generic accounts receivable email address rather than a specific person, you’ll need to identify the best person to chase at the business.
But what if you’ve done all of the above, and still haven’t had any luck?
The next step is sending a debt collection letter, also known as a letter of demand. This is considered a more formal follow-up, and is typically sent with your business’ letterhead.
Recently, the acceptable time frame for sending a debt collection letter has reduced from 90 days to 60 days from when the invoice is due.
You may also want to consider outsourcing collection of the debt to a debt collection agency. This agency works as an agent of your business to collect overdue debts, and is typically paid a fee or percentage of the total amount collected.
Whether to go down this route depends on a number of factors. If it’s come to the point that your business is running out of cash, then calling in the professionals may well be a worthwhile investment, despite the fees involved. The beauty of a debt collection agency is that it has the resources to keep the ball rolling when your own in-house collections have stalled.
Another good reason to hire a debt collection agency is that they’re one step removed from your business. While personal relationships with suppliers and customers can sometimes make it difficult to have that hard conversation regarding money, external agencies don’t have that issue.
Finally, if your debtors have gone into hiding, and aren’t returning phone calls or responding to letters and emails, debt collection agencies have a number of means at their disposal for tracking people down.
Ultimately, prevention is better than the cure
Once you’ve gone through your cash flow spring clean, it’s worth ensuring that you have an effective debt collection strategy in place to stop overdue invoices spiraling out of control.
A pre-planned strategy will include your process for following up overdue debts, your time frame to escalate to management, and the third-party agencies (like legal and debt collection agencies) that you will call on as needed.
If this is applied consistently with every customer, it sends the message that your accounts receivable house is in order, and reduces the likelihood that debtors will drag their feet when it comes to future invoices.
Arjun Singh is the co-founder of ezyCollect.