According to the latest Dun and Bradstreet Trade Payments Analysis, the average payment time for small businesses increased to 53.2 days in the June quarter, well above the standard 30-day payment term.
Unlike their larger rivals, small businesses typically are not able to devote much time, money and resources to pursuing debtors, which in the worst-case scenario can cause a considerable impact on cash flow.
Fortunately, there is an old-fashioned tool available to handle the problem and ensure that fewer debtors does not mean less clients.
Get on the phone
Roslyn Buckley, owner of CashFlow Support Services, says the telephone is the best device to use first when communicating with late payers.
“A lot of businesses are in the habit of sending out statements and letters to late payers,” says Buckley. “But based on my 25 years experience in the industry, people tend to ignore them. A statement is only a checking document. Letters get thrown in the bin and emails get deleted. Instead, you really need to get on the phone – it’s the best debt collection tool and also key to maintaining the client relationship.”
Often, it can be a simple matter of the customer having mislaid the invoice or overlooked it, and it is only by communicating that the real issue can become apparent.
However, rather than the business owner or client manager contacting the customer, Buckley says it is preferable for a third party to call, such as the accounts receivable employee or outside consultant.
“Business is all about relationships, and it’s important when asking for money to do it in a friendly and professional manner so people understand it. If you do it in a non-aggressive way, you can build rapport with the debtor. In some instances, people will only pay those who telephone, and this is especially important if you’re an unsecured creditor.”
However, not all debtor issues can be solved with a simple phone call, and it is at this stage that negotiation skills are required.
Negotiate a repayment plan
Some businesses have a policy of escalating matters with the threat of legal action, or outsourcing the problem to debt collection agencies. However, if owners wish to keep the client, then negotiating a repayment plan offers the opportunity for both parties to save face and continue working together.
According to Buckley, negotiation is an acquired skill, but the key is getting the client to offer a solution.
By asking them how much they can afford to repay, the client will generally provide more information on their financial affairs, allowing for more negotiating leeway over the pace of repayments.
Each case should be treated on its own merits, with an established client, particularly a government organisation or major company, afforded more leniency than a new customer with a troubled relationship.
By setting out the terms of business in the original letter of engagement, both the business owner and client can be made aware of what to expect should the worst come to pass.
Shorter repayment terms
Buckley says that in the current climate, business owners are advised to seek shorter repayment terms in line with their payment cycle, such as seven or 14 days. Other options include seeking prepayment or part-payment during the project to ensure the owner does not finish empty-handed when the work is completed.
All businesses pursuing debts are bound by the ACCC guidelines, which specify hours of contact, frequency and other obligations of debt collectors. The Australian Institute of Credit Management is another source of educational and industry information.
By maintaining the client relationship, the funds may arrive much quicker than by adopting the hard-line approach from the outset. Ultimately, it’s about cutting debts, saving time for your business, keeping clients and saving money.
This article represents the views of the author only and not those of American Express.
Anthony is a communication consultant at BWH Communication and a freelance writer with 15 years' experience in the stockbroking and media industries of Australia and Asia. He is a regular writer on business and other issues for publications in Australia and Japan. He consults on communication strategy to businesses ranging from private enterprises to professional service firms and publicly listed companies, with a particular interest in entrepreneurship in all its forms.