Credit Management for Small Businesses
I got a phone call from an accountant the other day who has recently set up a small business with a number of other businessmen. The accountant has ended up with more of a hands-on role than his fellow-shareholders, and one of his responsibilities is collecting the unpaid bills. His colleagues have remonstrated with him about the fact that he is calling customers before the end of the month to remind them about accounts which were only due on the 20th.
"They tell me, 'no-one starts asking for money that quickly,'" he said. "Are they right?" he asked me.
The answer is "no, they are wrong." Ten or twelve years ago, they might have been correct, but not now. More and more of the credit staff I meet in seminars are starting their follow-up on unpaid accounts before the end of the month. Some are even starting before the account is due. There are some tricks and techniques to help make these early phone calls non-threatening, and they take a certain degree of confidence and skill, but most of this comes with practice. The accountant in this case had what was required. He had good telephone skills, plenty of charm, and was not afraid to ask for money.
Interestingly, most of the reasons small business owners are embarrassed to follow up quickly on unpaid accounts are psychological. For example, one subconscious fear is that it might give people the impression that the business is not successful. Ask any conman and most salespeople: one of the keys to successful selling is to convince the prospective buyers that they are dealing with a winner. Many owners of small businesses are regularly misrepresenting the state of their business. Some feel that chasing their bills implies that the business is struggling for cash and desperately needs the money, and, true or false, this is an impression that they are disinclined to convey.
What advantages do you get through following up early? There are so many that there isn’t space to spell them out in this article, but let me elucidate on the two main benefits. The first is that quick follow-up on unpaid accounts not only improves your cashflow and reduces your overdraft expense but it also reduces bad debt. This is not generally recognised. Creditors often act as though delay has no effect on bad debt; as if the money will be there whenever they get around to asking for it.
A debtor who is in financial difficulties now will probably be in worse difficulties later. If you ask for the money today, you might start a ten day process which culminates with you getting paid; if you ask for the money in two weeks, perhaps you start a three week process which culminates in you sending the debt to debt collectors (because the money that would have paid your debt has gone to pay someone else); if you try to ask for the money in five weeks, you can’t because the debtor’s phone has been disconnected.
The second advantage comes from the well-known "squeaky wheel" effect. Every debtor has some sort of hierarchy of payment - a list in his or her mind, however vague, of who should be paid first if it were not possible to pay everyone. For example, for a consumer, the upper rungs of a typical hierarchy of payment might be:
Rent or mortgage
Power
Telephone
Rates (if a ratepayer)
Credit card
This hierarchy is subject to change, and the main cause of that change is the actions of creditors - the squeaky wheel gets the oil. You can move yourself up or down the list. If some lowly-ranked creditor gets on the phone and asks for his money, he will often be paid ahead of those at the top of the hierarchy.
Conversely, if one of the high priority creditors is known to be slow at following up on unpaid accounts, it is likely to be dropped down the hierarchy. An example of this was a power company I know. It should have been near the top of the list but because its collection process was known (among the debt-avoiding section of the community, at least) to be overly generous, payment was not a priority and its bad debt figures reflected this.
Some other points about this issue. First, it's important to realise that given the same set of creditors, different debtors will set wildly different priorities. Second, the priorities can often be changed by simply asking for your money and extracting a promise to pay, but in more difficult cases may be changed by argument and threat. In some cases it will be a matter of explaining that another creditor doesn’t deserve its position on the ladder ("don’t you know that your landlord can’t kick you out without going to the Tenancy Tribunal, and that’s going to take him at least six weeks?"). In others it will simply be a matter of making an appropriate threat.
Third, credit staff often ask me how they will find out about a debtor’s hierarchy of payments. The answer is that debtors who are trying to explain why they can’t pay you will often volunteer the information ("I have to pay A, B, C and D before I can pay your account") and if they don’t gentle probing will usually uncover it.
Back when I worked as a debt collector I can recall one debtor telling me that she had to pay a particular creditor because they had sued and would enter judgment if she didn’t keep to the agreed payment schedule. I advised my client (an accounting firm, as it happened) to rise up the hierarchy by doing the same.
And fourth, and last, never assume that a debtor has no money. There is almost always some money available. The issue is who is going to get it and who is going to have to wait.