The problems SMEs face collecting debts
No matter how large or small an enterprise is, internal collection processes can only take overdue accounts so far. No single business – even large ones – has the expertise, resources and capacity to collect accounts beyond a certain point. In the small business, it is almost inevitable that the business owner simply has no time to put together a concerted effort to collect outstanding debts in an organised manner.
In most cases small and medium enterprises (SMEs) do not have experience managing the often unexciting, but critical accounts receivable department. Even the most basic management information, such as an aged debtor summary − that displays a single line with the customer’s current receivable balance followed by the age of the outstanding amount (30, 60, 90, 120 and 150 day categories), is often missing or overlooked as a basic tool.
Prepayment is a way of mitigating slow collections, but realistically it’s seldom available. According to Roger Mendelson, CEO of debt collectors, Prushka Fast Debt Recovery, there is an increasing risk that slow payers can become bad debtors. Mendelson, who operates the largest privately owned debt-recovery business in Australia with more than 50,000 clients, says “If an account is 60 days overdue, then the chances of it being paid in 90 days are reduced; there is even less chance of it being paid in 120 days and at 150 days the chances are dramatically reduced.
The older the debt, the greater is the chance that it will become a bad debt.
A new paradigm - How to approach debt collection
According to a recent Westpac-Melbourne Institute Small Business Index, cash-flow is one of the main problems that cause SMEs to suffer financial difficulties and stress – two things that can easily be avoided at no added cost.
All too often the business owner is operating on a bootstrapping basis, juggling supplier and debtor credit terms to keep the cash flowing. Bootstrapping is inevitable when capital is scarce, but planning is a more effective strategy: that is, planning a clear calendar of where major expenses will occur and ensuring funds are available; in short, a cash flow forecast. Timing your invoices is another way to militate against debtor blowout. Invoice at end of each day or each week rather than at the end of month; or at the very least, as soon as the job is done. Then follow up any fees or debt owed to your business and ensure that these do not pass the 60-day mark. Once they are at this stage, they are far harder to recover.
“Insistence on prepayment is a luxury which only large businesses, with a strangle-hold on their market, can afford to indulge in,” says Mendelson.
He says too few business owners set trading terms. Mendelson says an essential part of an effective billings and collections system is to ensure it has a well drafted trading terms policy and processes in place for the customers to be legally bound by them. He says making the decision to extend credit does not have to be risky for business owners and company directors as long as some key rules are followed by their reporting managers.
Get paid on time
- Have new customers to complete a new customer form, so that you obtain detailed information.
- Carry out a basic credit check, such as an internet search and call the external accountant or a trade referee.
- Set up trading terms and include a provision that if the customer defaults, he will be liable for all collection costs.