You should categorise the balances as follows:
- Always pay the account on time.
- Always pay a little late
- Always pay a month late
- Old balance with an active payment plan in place
- Old balance still to be agreed
- Possible write off
- Definite write off.
If there are old balances with no agreements in place start with the largest balance and work down through them using the negotiating tactics you have learned on our training courses and make sure you get as much as you can as quickly as you can. Make sure your agreement is committed to writing either in letter or email and agreed with the customer. When possible automate the payment either by direct debit or a number of post dated cheques. Make sure you leave the door open for them to buy from you on a cash basis while the payments are going through, this way you will retain the customer, keep them talking to you, make additional profit from the extra sales and come to a speedy resolution. If you are doing business on a cash basis, make sure the current cash is allocated to the current invoices or put on a separate cash account; if you allocate the new money to the old balance you will never get payment for the new invoices as they will (rightly) tell you that they paid the invoice in full.
There are no absolute amount guidelines or length of time, just make sure you negotiate the best possible deal for your company in every case.
If there is a possible write off make sure every effort has been made to collect the money, if it is a sole trader who has gone away, look back on your account application form, check the phone book either in hard copy or online to get a home address or telephone number for them and contact them directly. Sometimes using a third party like Stubbs Gazette to send a letter on your behalf can bring a new sense of urgency and get results where you were unable to get a result. There is also the possibility of legal action, this tends to expensive and time consuming so make sure you have a clear case and that they have the means to pay you otherwise you could waste a lot of time and money.
If the balance is a definite write off, where the Company has gone into liquidation then write it off. You can reclaim your VAT on amounts written off so if you are charging VAT at the standard rate, at least you’ll get 21% back through your VAT which means it is a good idea to write it off as soon as you know there is no possibility of any payout.
If money is being written off because of a dispute, it is better to issue a credit note. This way the sales figure is correct, and so is any commission that was paid to sales people on foot of sales that didn’t materialize. There is no point in holding balances on your ledger that you are not going to get, you are probably adding to your costs by printing and posting statements every month for no reason.
When you have dealt with these three categories go back over the other four:
If they always pay on time – keep an eye to make sure they keep doing it, even a small slip here could be a sign of problems down the road and if you have hundreds of balances without this check it could go unnoticed.
If they always pay a little late, you have a choice either contact them to explain the importance of month end to you and see if they would agree to pay on the last day of the month instead or make a decision to live with it. If the later is your choice give them an extra five to seven days on their terms and start the collection process if they exceed this additional credit you have granted them.
If they always pay a month late could it be that they think they have an extra month’s credit? If so and you are happy to live with it amend your terms and make sure they adhere to your extended terms. If you are not happy then you or the sales person must have the conversation sooner rather than later.
This should give you a new way of looking at your ledger that should highlight some areas that require immediate action.