The GroFin Guide for entrepreneurs: How to manage collections

You won a big order from a reputable client, managed to ship the goods on time and heaved a sigh of satisfaction at successfully closing an important sale. We know the temptation to pat yourself on the back is great, but the job is only half done – the money still hasn’t found its way back into your business. Bottom-line: Until you get paid by your client, the sale is not closed.

Indeed, we often hear clients saying that sales are up but they encounter cash flow problems as a result of the very sales that they have made – on credit terms. Customers pay late, or, in some cases, not at all, effectively ensuring that the money has not yet been received against sales made but cash has already been paid by the entrepreneur to buy the goods meant for sale.

In effect, collecting money from customers can be one of the toughest tasks that your business faces, especially when it is an entrepreneurial venture where timely receipt of monies from your clients can mean the difference between paying your staff their salaries, and telling them to wait yet another month till pay day. In the worst case, delayed payments from your customers could force you to re-negotiate and stretch payments to your own suppliers, causing your creditworthiness to take a nosedive.

Also, it is at times noted that entrepreneurs become victims of their own success as they go on to win big-ticket orders from ‘trophy’ clients, essentially large companies with great market reputation and strong market clout. Getting flooded with large orders from such trophy clients could give your business great mileage and add several successful case studies to your marketing suite, but it could also mean unwarranted delays in payment amid an inability to bring pressure to bear on such sensitive and valuable clients. It is often seen that such sales wins culminate in over trading, as big clients demand stretched credit terms which are invariably more favourable than supplier terms. This, taken together with additional funds that need to be injected into the business to execute such big orders, is likely to lead to cash flow constraints for the entrepreneur.

With its thoughtfully designed and well-structured suite of business support services, GroFin helps its clients add value to their business in the critical area of accounts receivables management. Based on our wealth of experience in helping entrepreneurs manage their business without facing delays in payment, here are 10 ways in which you can manage collections for your business efficiently:

  • Understand accounts receivables management:

Most businesses define accounts receivables management narrowly as encompassing credit control, collections and payment processing. However, it is best considered as the entire “quote to cash” process, covering all the steps from creating a quote for a prospect or customer, order management and invoicing, to receipt of cash against the sales made. Also, apart from understanding the process itself, it is important to know how to track accounts receivables. The most comprehensive measure your business can use is the days sales outstanding (DSO), which gives you the average time taken to collect money from your debtors (calculated as Receivables / Average Sales per Day). A lower DSO ratio points to a conservative credit policy but could also mean that your business is restricting sales by keeping its credit terms too stringent. Conversely, if the DSO ratio is high, or increasing over time, it could be a sign that sales are being made to less credit-worthy customers, or salespeople are being forced to offer increasingly liberal credit terms to win orders (such as, for instance, from trophy clients).

  • Establish credit policies:

The selection of customers that will benefit from credit sales is crucial, and should be based on a sound credit policy. Indeed, this is one of the key areas where GroFin extends business support to its clients. It is critical to establish clear, written guidelines that set out, first and foremost, the terms and conditions for supplying goods oncredit; secondly, criteria for customer to qualify for credit; thirdly, the collections procedure, and finally, steps to be taken in case a customer defaults. Most importantly, if you are planning to extend credit to a customer, you must assess their capacity to repay. Credit checks may be expensive, but it may be a worthwhile investment to make before you entrust your valuable goods to a customer, and expect to be paid at the end of the credit period with reasonable certainty. While lack of data has limited the efficacy of credit searches in the past, increasingly, initiatives such as the International Finance Corporation’s Africa Credit Bureau Program are ensuring the build-up of advanced credit reporting information in several African countries.

Calculate debts ovedue

  • Use credit selectively and within limits:

Remember, credit is a tool you use to show a customer that they are important to your business, and that you respect their patronage. It is not to be used indiscriminately across clients but rather, offered as a select privilege to a few customers who have shown themselves to be creditworthy over time. Indeed, based on our experience with clients, we would even go so far as to say that one of the worst mistakes an entrepreneur can make is to sell goods on credit at a nascent stage of business. However, if credit must be extended, either because of high bargaining power of a customer or due to competitive pressures, the terms an entrepreneur gives customers should be less favourable than what he gets from suppliers. For example, if your suppliers give you 45 days to pay, you should give your customers 30 days to pay. Use a credit limit to begin with, and keep it low for a start so that you can monitor your debtor’s payment pattern before extending full-fledged credit across all orders from a particular customer. Once you decide to extend credit to a customer, make sure you get him to sign a contract that makes it clear what terms you are operating upon, timelines for payment and late payment penalties.

  • Employ financial incentives intelligently:

Whether it is penalties for late payment or discounts for early payment, financial incentives are important to reinforce good payment behaviour or to discourage bad payment habits. Be clear in communicating to customers both the discounts that will be extended for prompt payment, as well as the charges they are likely to pay for overdue payments. Feel free to employ creative incentives to get the customer to prioritise your payments. For example, declaring an early payment discount of 2%/10, net 20 days (translating into a 2% discount if the customer pays in 10 days against a payment due in 20 days) against, for instance, an average industry standard of 2%/10, net 30 days. If the payment is due in 10 days anyway, the client is less likely to forego a discount, and that much more likely to pay before time. Where finance charges are concerned, be careful to stay within legal limits and check with your state’s usury laws before deciding upon penalties for past due payments.

  • Use technology to your advantage:

Whether it to send invoices timely to your customers, receive payments promptly or track overdue payments, use technology to your advantage. Emails used to send invoices to clients have the added benefit of allowing you to fix the exact date for the credit period to begin, unlike snail mails where you would need to follow up with the client to establish receipt. Also, many businesses now use Electronic Funds Transfer (ETF) to receive payments from corporate clients, so you can go ahead and specify on your invoice that you would like to be paid by ETF, giving your ETF banking information – your bank, branch and account number. Additionally, on the collections front, make it a practice to run an aged receivables report from your accounting software and pay special attention to receivables due beyond a limit, such as 15 or 20 days. Finally, you can also use SMS reminders as an effective tool for payments due in a few days, or already overdue. Friendly SMS reminders in advance of the due date can also be used as marketing tools for new products, festive sales, or stock clearance alerts.

  • Establish personal relationships with your clients:

The client must be recognised as an individual rather than merely another customer number. We appreciate that this may not always be possible, but addressing a customer by name is worth a great deal. Especially if yours is a small business operating in a few locations, keep your customers close. While personal relationships and informal networks can go a long way in securing orders, such connections can go equally far in terms of ensuring that you get paid against such orders. Indeed, customer relationship management (CRM) is an integral part of accounts receivables management. And, CRM has never been easier, with the endless possibilities that social media offers. Follow your clients over platforms such as Facebook, LinkedIn and Twitter, and make sure you listen to their updates, like their posts, and comment on their newsfeed. This will show your clients that you are paying attention to them, and deepen your bond. Besides, following your clients over social media will show them that you have the resources and capacity to keep tabs on them, and they will have greater respect for you and your efficiency in running your business. Combine this with regular informal in-person visits with your clients (if this is feasible). A client that has just shared a coffee or a tea with you is more likely to pay fast than someone who has not seen you in months.

    • Start with reminders, and begin early:

    Establish a set process to follow up with your customers for payments, with regular reminders worded in a manner that suits the occasion.

    • Remind customers of payments due in a few days: If there is a week to go till your customer’s debt becomes overdue, do not hesitate to remind him that there is a payment deadline around the corner – make it clear what the amount is, when it is due, and what the penalty for late payment is. However, considering that the debt has not yet gone into overdue status, and there is every possibility that the client will pay within acceptable timelines, do not strike the wrong note in your communication. Be firm but remember that being polite can go a long way, with terms like “Please” and “Thank You” significantly increasing your chances of getting paid.
    • On the due date, if not paid, a further reminder should be sent: Of course, as soon as a payment is past due, a reminder becomes even more critical. If the client is a first-time offender, you could take a softer approach on the assumption that they inadvertently missed out on making the payment. However, for a chronically late-paying customer, you may emphasise the late payment clause, and make it clear that such behaviour could result in more stringent credit terms, or revocation of credit altogether.

    Get paid for credit sales

    • Make that collections call and prepare for customer excuses:

    If no payment is received within an agreed period, the client should be called to enquire reasons thereof and to negotiate new terms. The golden rule here is that if a customer contacted the entrepreneur informing them that they cannot pay for whatever reason, they had all intentions to pay but could not pay. The flipside is that if the entrepreneur has to call the customer to ask why he has not paid, he had no intention of paying in the first place. However, at all costs, you must steer clear of getting emotional about late payments, and avoid losing your cool over the time and effort spent in chasing debtors for overdue payments. Agreed, it is your business and your money, and that makes it intensely personal, but you must bear in mind that calls made in haste and conducted in an abrupt manner can be ruinous to a budding client relationship. A good tactic to keep your cool over a collections call is to be adequately prepared for the various excuses that a late paying customer is likely to throw your way.

    • Use instalment plans to restructure payments:

    If all else fails, and the client appears to have a genuine problem with meeting payments on time, do not give up and write-off the debts in a hurry. Instead, sit down with your customer, discuss a viable repayment schedule for his overdue debts, and prepare an instalment plan with his support and buy-in. Needless to say, it is much better to get some cash back, rather than nothing at all. Also, if the customer is genuinely facing a temporary stretch, they will deeply appreciate it if you support them at a time when they most need it, and may return the favour with greater patronage when their tough times are behind them.

    • Turn to the experts:

    You can supplement all the steps outlined above with discerning advice and valuable support from the experts. Whether turning to a collections agency to make collections calls on your behalf or approaching a factoring company to sell your debts at a discount, it may become necessary to use the services of experts when the sales of your business and its collections needs are growing. However, such agencies are normally fairly expensive and, for SMEs, especially those at a nascent stage, additional expenses contingent on such collections outsourcing should be avoided as far as possible, and only undertaken if absolutely needed, at properly negotiated terms.

    With GroFin as your expert financier, you can find all the help you need with running your business under one roof. GroFin can provide your business with the collections solution you are looking for, bringing to the table over 15 years’ experience in helping clients manage their accounts receivables efficiently. Take the case of Jordan-based HYGEX, a manufacturing firm with a range of cleaning and hygiene products, managed by entrepreneur Kameel Al Nims.

    The company was faced with cash flow issues as collections began to get delayed, even as larger and larger orders were received from satisfied customers. Accordingly, Kameel had to turn outside for finances to fund his ambitious growth plans for the business, while ensuring sustainability of operations.

    “Unlike traditional financiers, GroFin is not only providing us with the funds to expand our business but also is advising us on ways to solve core collections problems and cash flow issues,” says Kameel.

    “We have made recommendations to improve collection of receivables through standardising customer order points and quantities and collection timelines on the one hand, and negotiating longer creditor days and improving company stock reorder quantities and intervals, on the other,” says Wa’el Sunna, Investment Manager at GroFin Jordan.

    Throughout our relationship with you, from the pre-finance stage to the post-finance stage, GroFin will provide your business with appropriate business support designed to meet its growth needs. To date, over 8,000 entrepreneurs have benefited from our business support expertise. You could be one of them! Apply today and get the GroFin advantage on your side.

    This post was originally published on 14.12.15 on LinkedIn Pulse by Nishika Bajaj.