Credit Management Advice. How to set up an account with a new customer to ensure that you get paid on time.


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Credit Management Advice > Collect cash

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Get close to your Customer	Have a clear Account Display
Make your Credit Terms very clear	Achieve adequate Collection Coverage
Open New Accounts Properly	Set Targets and Priorities
Issue Effective Invoices Rapidly	Effective use of accounting systems to help manage late payment
Using the internet for collection	Use Third Parties sooner rather than later
Cheques and Cheque Clearing	Measure Collection Results

Set Targets and Priorities

Policy: - the company boss should make it clear to all relevant staff that THE COMPANY IS IN BUSINESS TO EARN CASH FROM CUSTOMERS and that A SALE IS NOT COMPLETE UNTIL IT IS PAID FOR. All staff have a part to play. For example, account queries are not low-level clerical matters. They are complaints from unhappy customers who feel let down. They justify non-payment and should be resolved in 7 days as prime customer service priorities.

Targets: - the rate of cash inflow should be reliably in line with sales made. Work to a monthly Cash Target to achieve a specific Days Sales Outstanding (DSO) ratio which measures Total Debtors against Total Sales made. There should be constant pressure to reduce DSO, which is the average time customers take to pay. Secondary targets can be set to reduce certain kinds of debt; e.g. overdue 60 days above £500.

Resources: - CASH COLLECTION IS HIGHLY COMPETITIVE - DO NOT SKIMP THE RESOURCES NEEDED. A trained collector can only control about 600 accounts, making about 20 calls per day, amongst other work. Inadequate staffing rebounds in interest expense while waiting for slow payments plus some painful bad debts. It usually pays to separate collection from ledger work - the skills and time priorities are different.

Timetable: - Every business should have a timetable for following up accounts too small to telephone economically, showing what to do and when, if the previous action has failed. See example below.

Example of a Timetable for following up accounts
Action to take	Action date	Days overdue
INVOICE	8 June	0
STATEMENT (not yet due)	3 July	0
DUE DATE	28 July	0
STATEMENT (overdue reminder)	3 August	6
POLITE REMINDER LETTER	10 August	13
STOPLIST	15 August	18
FINAL REMINDER LETTER	24 August	27
COLLECTION AGENCY	3 September	37
CASH RECEIVED	10 September	44

(Total time for revenue = 74 days)

This example may be seen as too tough by some and too lenient by others. What matters is that sellers have their own version.
Involve senior people as needed; aim requests for payment further up the hierarchy if normal contacts fail. Notify sales staff before stopping supplies - they may be able to get the payment. The Financial Director should sign Final Demands. Managing Directors should be kept informed of problem customers and asked not to override procedures.

Use Third Parties Sooner than Later

If customers ignore reminders, it could be because they are waiting for a significant threat; using a third party can have a stirring effect.

Collection Agents: - They work on a 'no collection - no fee' basis and charge 5 - 15% of amounts collected, depending on complexity and volume. Good ones collect over 80% in the first month because of their third-party effect and full-time effort. Send all undisputed debts below a certain value to an agency after a certain time. This releases your own resources to collect large, current amounts from active accounts.

This Debt Collection Agent Checklist sets out the key information which the credit manager should have to hand when appointing a debt collection agency

Non-Court Action: - Going to court is not the only way of resolving a dispute. There are other options such as negotiation, mediation, conciliation or arbitration. The Lord Chancellor's Department has produced a leaflet 'Alternatives to Court'.

Solicitors: - They issue powerful letters in a short space of time, charging a pre-agreed fee. Find a firm specialising in debt collection, not just any solicitor.

Statutory Demands: - can be sent by the seller, collection agent or solicitors promising an application to court for the formal Winding-Up of the business if payment is not made within 21 days. Alternatively, the seller can obtain a court order for the debt.

Court Action: - Solicitors are essential for High Court actions but not county court. Fees are higher in the more effective High Court. Before suing, check that there is no known dispute, no other useful steps are possible and the customer has the means to settle.

If the seller decides to begin legal proceedings it is advisable that they provide the solicitor with all the necessary information pertaining to the debt in a clear and succinct format from the outset. The seller may use this Form of instruction to solicitors for this purpose.

The Form of instruction to solicitors is designed to ensure that the seller avoids the inaccuracies that can undermine a claim such as:

The need to ensure that the name under which the seller is suing matches up exactly with the name of the company or trading division with which the customer originally contracted.
The need to identify the status of the debtor, i.e. whether they are trading as a sole proprietor, as a firm or as a company. This is vital to ensure that the proceedings are being taken against the right party/individual.
The need to give essential information about the debt itself, such as the amount due, whether it has arisen as a result of goods sold and delivered, services rendered or work done and materials supplied. It is always useful for the solicitor to be given copies of invoices and details of the dates, numbers and payments due under each.

The Court Service provides free information sheets and leaflets on the debt recovery procedures available through a county court including 'A guide for businesses to debt recovery through a county court' in PDF Format.
There are also more details in the Further Reading section of this website.

NOTE: Legal procedures in Scotland and Northern Ireland are different from those in England and Wales. Further information can be obtained from the appropriate Sheriff Court in Scotland or county court in Northern Ireland.

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