 |
Over the last few years the media appear to have sided with the consumer whose plight has been depicted as an unfair battle against ruthless creditors who will stop at nothing to enforce unconscionable agreements. However laudable these efforts, sight must never be lost of the fact that these debts arose as a result of commercial enterprises supplying goods and services in good faith to consumers. And our economy would soon grind to a halt if these enterprises were prevented from enforcing their right to payment effectively and efficiently. After all, these companies also in turn have to pay their creditors and staff. Those who struggle most are small and medium sized businesses who do not have the resources to implement elaborate credit risk strategies.
In this article we examine the steps that a smaller business can take to improve his arrears book by dispelling a few myths about debt collection and arrears management.
1 HONEST DEBTORS PAY THEIR BILLS
The reverse (so the myth goes) is that dishonest debtors don’t. In reality the matter is far more complex than that. Debtors do not generally take a moral view about cash flow management, they do a risk assessment. When household finances are under strain debtors will choose to survive rather than pay their bills. However, where less than survival is at stake, the debtor will evaluate the potential harm flowing from not paying his bills against the cash flow advantage of not settling his bills. Where the potential harm is too high the debtor will invariably honour the payment.
Yet harm is a subjective measure. To some individuals reputational harm is less onerous than say a credit listing which leads to a suspension of credit. To others it is the other way round. In some households the greatest fear is that other members of the household discover that a bill has not been paid, the culprit having spent it on something else.
To complicate matters there is a distinction between hard and soft debtors. Hard creditors are those who switch off the electricity, telephone or television. Soft creditors are those who only have recourse to the usual remedies in contract law. Debtors tend to pay hard creditors first.
As a manager of a debtor’s book you should accept the fact that there is an informal ranking of creditors in most households. Your focus should be on securing a safe position on this ladder, secure enough to ensure that you are not affected by marginal movements in the debtor’s cash flow position. Securing that position lies outside the scope of this article, but at the least the debtor should appreciate that you are serious about the collection of his debt and that his failure to honour his obligations will have immediate consequences.
2 THE DEBTOR IS COMPLETELY BROKE
It is relatively rare to find a debtor who is completely and utterly broke. The very fact that he answers his phone or arrives at your front desk indicates that he is maintaining some sort of an infrastructure. So when a debtor pleads poverty he means that other creditors and priorities outrank your bill. But this is a matter for negotiation and unless the debtor is labouring under a formal process such as sequestration or administration, in most cases a common solution can be found.
A debtor’s cash flow problem goes hand in hand with a request for more time. Before granting such a request, be aware of the following. Time is the biggest enemy of unpaid bills because (1) debtors tend to lose their memory about the quality of services rendered (2) contact details change all the time (people move, get divorced, get sick and forget their loyalties). (3) new creditors enter the fray, putting more pressure on a strained cash position.
So finding a payment plan or solution is imperative. However, forging a plan that suits both creditor and debtor is a question of balance. If the debtor is pressed too hard he will default or decide that the advantage of not paying the bill outranks the risks involved (point 1 above). Where the plan is too lenient, the creditor ends up financing his debtors, and he carries the risks associated with time as described above.
A payment plan, however deficient, is a better option than allowing the matter to fester in the filing cabinet. Be persistent about getting a commitment from the debtor and be precise about dates and amounts. Record the details of such promises meticulously. You will find that your debtors will: (1) once committed, generally honour their commitments if monitored closely (2) generally fall into a paying habit after honouring the first instalment (3) move you up the creditors’ ladder, and (4) be precluded from relying on any possible breach of contract.
3 MY BOOKKEEPER/ DEBTORS CLERK KNOWS HOW TO MANAGE THE ARREARS BOOK
If your bookkeeper or debtors clerk knows how to manage the arrears book you are in a very small statistical minority. The problem lies not in willingness to perform or commitment to the organisation, but the fact that bookkeepers usually have a technical financial training but are placed in a negatively charged emotional environment where the management of the arrears book is concerned. Dealing with arrears debtors is not a precise activity and the success factors are mostly abstract. Most bookkeepers are adequately trained to deal with the financial aspects of the arrears book but woefully undertrained to deal with the social aspects.
In smaller businesses this problem is exacerbated when the task of arrears management is performed from a position where staff turnover is high, for instance in the case of a junior debtors clerk or temporary secretary. The cumulative knowledge and experience are lost every time a staff member leaves.
A related problem, possibly as serious, is the complexity of the legal environment. Although one cannot expect bookkeepers or debtors clerks to perform as lawyers, they should have a sound grasp of the basic principles on which your claim is founded. In my experience, the lack of knowledge in this arena is astounding.
It is worth taking a hard and sober look at this critical function. Where training is needed, invest in it. Where process design is needed, do not think twice. If you have to make hard decisions about staff appointments, do so.
4 MY DATA IS IN GOOD SHAPE
Unless you have a structured process in place, the odds are that your data is poorly managed and often unreliable. Data management relates to processes that ensure that information about debtors is continuously maintained, supplemented and verified. If your business is managed like most others, you will have critical data fields missing, such as ID numbers, telephone numbers, physical addresses and cell phone numbers. If the person who captures the data has not been specifically trained, it is likely that no verification of data has been done. There could be major inconsistencies in the same data fields (e.g. date formats, text characters in number fields, debtor reference numbers, using patient data vs account holder data etc).
The end result is that the debtor has left the building, the service has been rendered and the bill is outstanding. The data base is the sole record of what has transpired. All future contact with the debtor depends solely on the integrity of the database. Despite huge leaps in telecommunication, our options in communication are confined to a few stark choices: telephone, letter, sms and e-mail. If incorrect or incomplete, such debtors are extremely difficult to trace and costs increase exponentially.
By focussing on the front desk data processes you can substantially increase your data accuracy and integrity. Not only will you improve your in-house processes but also the success of collection agencies when the debt is handed over.
An audit of your data capturing processes need not be an elaborate affair. In essence you need to establish whether critical data fields are filled in and verified. In this regard you need to ensure that all legal requirements have been met (i.e. the contract is signed), the account responsible person has left full contact details and they are verified, the payment instructions are clear, the invoice will be sent to the right address, the payment date is stipulated (e.g. 14 days after invoice) and the date when services was rendered is described.
Sounds easy? Of course, except that 80% of all businesses fail to get this right. Those that do manage to cut their arrears book by a whopping 30%.
5 CONCLUSION
In sum, if you wish to see a remarkable improvement in your arrears book: improve your ranking on the creditors’ ladder, pursue payment promises relentlessly, employ good staff and manage data more efficiently.
Werner J du Plessis, (BA LLB MBL) is the CEO of Duvesco Holdings, a Western Cape based company that specialises in debt management for smaller and medium sized companies.
|
|
|
