Controlling and Collecting Debts
Financial Reference Sheets
Future Practice Owner.
Declaration
Please note:
All financial information shared in this document is fictional data that has been created for learning purposes. It is not representative of any true financial data for Vets for Pets or Companion Care. This reference sheet has been based on the initial ‘controlling and collecting debts checklist’ created by the CMI, and hosted as part of Management Direct. Original content and information is, therefore, copyright 2017 Chartered Management Institute.
Future Practice Owner.
Controlling and Collecting Debts
Introduction
All businesses need to control debt including ensuring that debts are paid and paid on time as late or non-payment of debt can be a major source of cash flow problems. The implementation of effective credit management polices (See the related checklist Controlling Credit) can help to pre-empt problems, but it is likely that all companies which extend credit to customers and clients will, from time to time, be faced with situations when payment is overdue. The point at which this becomes problematic is a matter for individual decision and may vary depending on industry or sector, but it is clear that excessive levels of debt can lead to stress for managers and financial difficulties for the business. Controlling debt and debt recovery is not an easy task, but it is an issue which must be faced. Effective processes for controlling debt and following up on outstanding debts will help organisations to ensure payment of as much of possible of the monies owing and reduce the likelihood of financial difficulties. This checklist outlines sound principles for action.
What is Debt Control?
Debt control is a strategy and a series of processes and procedures adopted by organisations in order to recover money owing to them after credit has been extended to customers or clients for goods and services.
Future Practice Owner.
Controlling and Collecting Debts
Action Checklist
Remember that prevention is better than cure
Review organisational systems and procedures
Concentrate on big debts
Write positive letters
Follow up letters by using the telephones if appropriates and necessary
Remember email as an alternative to a letter
All else having failed, consider visiting the debtor
Appoint a debt collection agency
Think carefully before you instruct solicitors or become involved in litigation
Don’t return a post-dated cheque without thought
Beware of taking any unreasonable or illegal actions
Future Practice Owner.
Controlling and Collecting Debts
Controlling and Collecting Debts Checklist 1. Remember that prevention is better than cure
As mentioned above, effective credit management policies and procedures can help to minimise the risk of overdue payments. In addition consider steps which may be taken to minimise the possibility of bad debts. Decide who will operate your policy. Some of the options include: a factoring agency a lawyer or agency providing access to standard stationery your own colleagues - either dedicated exclusively to debt collection, or acting as part of the accounts control or credit team. Be aware of any relevant legislation. In the UK for example the Late Payment of Commercial Debts (Interest) Act 1998 and the 2002 and 2013 regulations amending it, make provision for companies to charge interest on outstanding debts after a certain period of time has elapsed.. The legislation is intended to deter late payment and penalise late payers. systems which detect arrears and potential bad debts early good communications between departments, especially sales, accounts, credit control and debt collection colleagues with appropriate specialist knowledge and good interpersonal skills regular reviews of policies, procedures and criteria for granting or extending credit firmly applied policies with regular reviews to ensure that debt collection procedures are implemented immediately when appropriate regular training or refresher courses in interpersonal skills, for example, in developing an assertive, but sympathetic manner. 2. Review organisational systems and procedures There will be a need for:
Future Practice Owner.
Controlling and Collecting Debts
Controlling and Collecting Debts Checklist
3. Concentrate on big debts
Remember that 20% of your debtors probably account for 80% of the debt outstanding at any one time. An even smaller percentage is involved in bad, or potentially bad, debts. Pursue the big debts first and remember that, while it may be easier to collect the smaller sums which are overdue, this may not necessarily be the best approach.
The effectiveness of debt collection should be assessed by the amount of money recovered and not by the number of debts collected.
Bear in mind, however, that: several smaller debts can add up to one large debt for a large debt a phone call before it falls due may be appropriate for a small debt the process may start with a letter one month after payment is due debts are seldom as simple as a single invoice or one month's transactions - they usually involve many transactions with invoices and credit notes over several months.
Future Practice Owner.
Controlling and Collecting Debts
Controlling and Collecting Debts Checklist
4. Write positive letters
Recognise that in the first instance an approach by letter or email is easier and cheaper than approaching your debtors by telephone. Be sure that your letters are courteous, clear, specific and that they are addressed to a named executive. Be firm, concise and unwavering. Do not include an apology, suggest compromise or refer to the possibility of part- payment. Do not avoid the issue of payment now by asking about reasons for non-payment rather than for payment. Recognise that an excuse is no substitute for your money. Understand that if you make threats you must be prepared to carry them out or you are likely to lose credibility and are unlikely to be taken seriously in the future. Having pursued a debt by letter or email, re-apply your control of credit procedure before extending further credit. Consider putting all business on a deposit in advance or cash on delivery (COD) basis until you receive payment and can satisfy your conditions for the granting of credit. For maximum impact ensure that your correspondence appears to have been customised to the individual. This can be demonstrated by making specific references to the amount owed and to any previous letters, quoting dates.
Future Practice Owner.
Controlling and Collecting Debts
Controlling and Collecting Debts Checklist
5. Follow up letters by using the telephone if appropriate and necessary The telephone is an essential tool in collecting payments. You should not underestimate, however, the cost and time commitment involved with telephone calls. Before calling the debtor, be fully prepared. Make sure that you have all relevant documentation, to hand including copies of invoices and are sure of the following information: Many organisations have three or four letters which escalate in tone and authority. In order to provide proof for any potential legal proceedings, these need to be issued regardless of other courses of action. Avoid using the word, `first', such as `first demand'. `First' implies `second' or more to follow and may give the debtor a reason to delay payment. Avoid the use of `final' unless you mean it, be polite, brief and firm. Give the debtor a better reason for paying than for not paying. For example: offer an opportunity to protect the debtor's reputation point out the advantages of continuing to trade together point out the advantages of enjoying - but not abusing - credit terms, and of ensuring their continued availability suggest that payment will ensure that third parties do not become involved express the hope that legal action can be avoided.
the debtor's correct name and legal status the name of the person you need to talk to the amount, date and full details of the debt the agreed terms and conditions of the sale or supply
details of previous communications, if any the date of the last payment (if any) received a prepared response for excuses, requests for more time to pay and requests for acceptance of part payment.
Future Practice Owner.
Controlling and Collecting Debts
Controlling and Collecting Debts Checklist
Having contacted the right person, give your name and personalise the discussion. Recognise the need for persuasive skills to gain commitment, to convert interest into action and to find out reasons for the delay - these may be relevant to the future generation of credit. Find out, if you can, whether a query, dispute, financial problem or oversight lies behind the delay in payment. If you are told "a cheque is in the post", press for details. When was the cheque sent, where from, and what were its date and number? If it was not for the full amount outstanding, why? If the debtor fails to honour a promise made over the telephone, you will need to consider what further actions to take. Likewise, if, after several attempts you fail to contact the person to whom you wish to speak, escalate the debt recovery chain.
6. Remember email as an alternative to a letter
While formal letters are often preferred for debt collection, note that an email message can be cheaper and quicker. Bear in mind that the content may be more public within the debtor's organisation and that this may have an impact. An email can be sent direct to the desk of the recipient and therefore gain immediate attention.
Future Practice Owner.
Controlling and Collecting Debts
Controlling and Collecting Debts Checklist
7. All else having failed, consider visiting the debtor
Visiting is the least cost-effective method of collection; it is difficult for those who wish to avoid confrontation, and you may feel that you have lost face if you leave without a cheque in hand. If you decide to visit the debtor, arrive unexpectedly, be firm, courteous and unwavering and, if you are not able to collect a cheque, move quickly to the next stage.
8. Appoint a debt collection agency If you decide to use a debt collection agency, use only those licensed by the Financial Conduct Authority (FCA). Don't pay the agency ‘up front' or agree to a flat fee. Agree only to pay a percentage of what the agency recovers. Obtain a banker's reference and talk to other users of the agency. Be sure that you know the agency's terms and conditions and that these are acceptable to you.
9. Think carefully before you instruct solicitors or become involved in litigation Remember that solicitors are expensive and require payment whether or not they achieve results - seek advice and a price before making any commitments. Litigation is even more expensive. Before starting proceedings, make sure that: the debtor has money with which to pay, you have reasonable evidence of the existence of the debt; and that the debt is less than six years old. Be sure that you have the full name and address and legal status of the debtor.
Future Practice Owner.
Controlling and Collecting Debts
Controlling and Collecting Debts Checklist
10. Don’t return a post-dated cheque without thought
A post-dated cheque is better than no cheque. It may be paid if presented. It provides proof of debt if the bank does not pay the cheque. Consider carefully, however, whether you want to continue trading on the basis of post-dated cheques.
11. Beware of taking any unreasonable or illegal actions
Be aware of the dangers of being charged with harassment, for example by threatening violence, damaging property or breaking and entering. Know that you must not make such strong or frequent demands of your debtors as to cause them or their families concern, distress or humiliation. Also, remember that you must not represent yourself as having some official capacity with authority to enforce payment. Make sure that you are aware of the provisions of any relevant legislation, the Administration of Justice Act 1970, in the UK for example.
Potential Pitfalls Managers should avoid:
failing to take action to address the issue of outstanding debts starting by offering compromise forgetting that it's your money you are chasing - not theirs
Future Practice Owner.
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