Beware of negative reporting – most reports contain information about overdue debts, provisions and bad debts. When you look at these three measures they all have one thing in common – they are all negative and focus on what you don’t want.
Your overdue balances are the money you didn’t collect. Your provision is for the money you may not collect and your bad debts are the money you are never going to collect. Why tell a negative story?
Why not change the reports around to include: the amount of money collected in total, the amount of money collected from the three month balance, the number of queries resolved in the month, the amount of money collected from accounts previously provided for or previously considered to be a bad debt.
Why not include a perfect ledger if everyone paid to terms and analyze the gap between perfection and reality, in terms of can’t pay, won’t pay and shouldn’t pay where there are unresolved queries.
These unresolved queries should be a central part of your action plan in the coming month.
Resist the temptation of just having one report. If you want your report to be actioned, then you have to talk to your audience in their own language.
If you are circulating your report to sales people focus on customers, focus on areas that is making them unhappy and could cause them to seek your goods and services elsewhere, this could include unresolved queries, pricing disputes, service issues and customers who will have supplies withdrawn during the month if their account is not brought into line.
If your audience is accountants include lots of numbers, comparisons, this year versus last year, DSO calculations, aged balances, large balances etc as this will give them the information they need to accurately assess the situation.
If your audience is your Managing Director or very senior managers in a large company your report should have a cover page with a simple colourful graph – or two graphs at the most - that is positively framed – senior managers don’t like to see graphs that go down – it makes them nervous. If you are reporting on DSO’s, overdue debt, provisions and bad debts and you are doing a good job then all these graphs will be going downwards. Instead report on cash collected or % within terms which should have a positive impact if you are doing a good job. Some senior managers say they want the detail – if they do that can be attached or included in a separate file for their review – if they have time.
Behind all these reports you should have a set of reports just for you – the credit manager/ controller where you are looking at trends, exposures and any other item that is not an issue right now but could become a problem down the road and you job is to make sure these issues are addressed before they become a problem.
Finally, get your monthly reports out early; I would suggest they are circulated on the second working day of every month, the day after the statements are sent. That gives you the whole month to continue your improvements.
Write Off Controls
In most companies it takes the signature of a senior accounts person and two directors to pay a supplier or raise a cheque and banks are reconciled and cash accounted for on a daily and weekly basis.
At senior management level there isn’t the same tight control on every single outstanding amount on the debtor’s ledger, the fact is that every balance on the ledger is potential money to the business, and this money should be treated the same as all other money.
What back up do you require before you write off money?
If a company has gone into liquidation – you should have a copy of the notice of Creditors meeting, a copy of the statement of affairs showing your company and the balance you were owed that should match the amount being written off, and if possible an update report or letter from the Liquidator stating the likelihood of you receiving payment and/or a printout from the Companies Office showing the correct status of the Company.
If a company has gone into Receivership, part the existing account, open a new one for the Company in Receivership, get the Receiver to recognize your retention of title for any goods you have there at the time and make sure he is personally liable for any debts that are incurred as long as they are involved, and offset the margin made on these sales against your specific provision for the debts of the original company. As soon as the receiver has got what they came for continue your collection action against the original Company for whatever amount is outstanding.
In the event the debtor is “gone away” - I have seen a bunch of envelopes attached to the write off request as full back up. This is too simple, if the owner is a sole trader they are still personally liable for the debts they incurred, get the home address from your account application form or other sources and make contact directly to make arrangements for the money to be paid. If the debtor is a company: are they trading somewhere else, have they moved or are they gone?
If the write off is due to a dispute, should it be taken off the account by means of a credit note? Usually write offs don’t affect sales, so the salesperson has the full sales amount in their figures and if you offer commission they have received commission on the full amount. By issuing a credit note you correct the sales figures and reduce the liability for commission, and reduce your bad debt write off’s.
Finally have a rolling system for formally writing off balances, preferably on a monthly basis. Even quarterly is better than annually. If you have a long list at the end of the financial year there is a greater chance that something could slip through the net that should not have been written off in the first place.
A debt is a debt, even if you write it off at some stage you can reactivate the balance at a later stage if the customer’s circumstances change. You should keep an eye on the “Satisfactions” section of your weekly Gazette to see a list of these.
A note about “Statute barred” some people think that this means that a debt is wiped completely after seven years, this is not true – it only means that you could be barred from taking legal action for recovery of the debt if it has gone unrecognized for that period. One other thing to note is that “Statute barred” is just a defense. You can still take legal action for a debt that is ten years old, it is up to the debtor to lodge a defense of “Statute barred” and we all know that 90% of judgments are not defended.
Finally, make sure a note of the amount and circumstances of the write off are clearly documented on the account – NEVER delete the masterfile record – just in case they come back at a later stage looking to do business with you. Diddle me once – shame on you. Diddle me twice – shame on me!