Chasing Customer Debts Article


Article by Drew Coles member of the Chartered Institute of Management Accountants

Chasing customers debts
Sometimes customers don’t pay or may pay very late, this is the reality of running a business and most businesses, if not all will experience this at some point during trading. This article will go through some of the most effective options in order to collect customer debts while trying to be tactile in the process.
The following is our order of how debts should be chased. The most important part is understanding why the customer is not paying. There may be situations where a certain customer always pays late, and this is known to the company or there may be other cases were a customer is late for the first time. These situations should be dealt with separately being mindful of how important the customer is to the business.
Debt collection

1) A statement

At month end a statement detailing all outstanding invoices should be sent to the customer. This serves two purposes, firstly this subtly reminds the customer that there is invoices outstanding and secondly it allows the customer to get in contact with the company if they have not received all invoices on the statement.

2) An email

Approximately one week after sending the statement an email should be sent to the customer politely asking for settlement. It is preferable to attach a PDF copy of the statement as well as the outstanding invoices and the email should be sent with a receipt to allow the company to see when it is received and opened.

Telephone call to chase debt

3) A telephone call

If the above two methods fail to heed a response a telephone call to the customer should come next. The manner of the call should be to the point but polite pointing out to the email and statements sent. It is important to remember there may be a very good reason why the invoice hasn’t been paid and at this point all options should be discussed including taking smaller monthly payments and discussing possible issues with the product or service delivered.

4) A letter

Another period of time would pass before a letter would be sent. This letter would be sterner in its wording and outline the dialogue between the two companies and promises made. The letter should set out a clear time limit for settlement of outstanding debts as well as consequences if the debt remains unpaid. Consequences could include not delivering further orders or services or finally using debt collectors.

Case study

Its widely accepted that the longer a customer debt is outstanding the harder it is to settle the outstanding amounts. This is generally true in all the cases we see and therefore it is critical to chase the debt as soon as it falls overdue.



Debt collecting letter

5) A visit to the customers premises

Lastly a visit to the customers premises would occur. This would allow the company to gain a greater understating of the customers position and whether there are issues with business cash-flow or sales. It would also allow the company to see if the debt will be recoverable. If a meeting with a manager is successful it may be possible to still recover the debt.



Visit customer to chase debt

How to minimise the chance of bad debts

Monthly statements outlining outstanding invoices
Its good practice to send monthly statements to all customers and good Accounting software will allow you to do this easily.

Customer due-diligence
Use customer due-diligence procedures to check new customers before starting to trade Using tools such as credit reports and financial statements can allow you to build a risk analysis of the customer.

Prompt invoices
Sending the invoice ASAP after the customer receives the product or service reduces the risk of non-settlement.

Upfront payment terms
Asking the customer for payment before delivery of product or service would reduce the risk to zero but will not work on most business to business trading as a credit period and terms are normally required.

Other options

Insurance
Insurance can be used on customer debts and usually covers a percentage of the total debt and the organisation will need to check if the cost of the insurance is less than the cost of the bad debts if not recovered.
Invoice factoring
Using an invoice factoring or invoice discounting service with no recourse. Invoice factoring provides you with a percentage of your customers invoice upfront and the rest paid to the business on settlement minus a fee to the factor. Non-recourse factoring results in the company receiving all funds from the factor whether the customer settles the debt or not.


miminise customer debt risks

Related Artcle

Cash-flow improvement

Spreadsheet showing cash flow improvement

This may interest you

Risk Management

Risk management cycle

This may also interest you

Performance Measurement
bar chart showing Performance measurement