How do I deal with debtors?
How do I deal with debtors?
What are debtors?
Debtors are the customers that still owe you money for the work that you have done for them. This money may not have been paid to you when it was expected so it is overdue. It may be money that has only been invoiced and is not due to be paid yet.
You need to keep debtors as low as possible
It is essential for your business is to keep debtors as low as possible. The money that you are owed can help your business. It can reduce the borrowings that you have and the interest that you are paying for finance. It can help you pay for new equipment. offices, marketing or staff that can help your business grow.
Having a high amount of debtors increases the risk of them turning bad and you losing the money entirely that you have worked for. It is vital to keep them as low as possible and to have a system in place to collect them on a consistent basis.
Can we make it easier to collect debtors?
Getting debtors is an evitable part of the business process. You do work, the client is invoiced and you wait for payment. But perhaps we can look to change this process and try to get away from this and make the collection process easier. This is especially true if you invoice your work after the project has been completed.
If you were to make the client pay interim payments over the course of a project, that ensures that you are paid before the work is done. It makes sure that the customer is not faced with a big bill at the end of the work. It is broken down in to easy manageable payments. Collecting these payments by direct debit also makes sure that they are made each month or at regular intervals.
Do you need to offer payment terms?
Offering early payment terms has long been established as a way to get payment earlier from your clients. The incentive is that they can get a small discount for paying early. This can seem very attractive to them if they have the funds to make payment early and are not reliant on managing cashflow themselves.
It is still common practice to offer payment terms on invoices. This seems to be a throwback to the days when invoices were still paid by cheque. The client would need the time to get the cheque signed, posted and delivered and it was typical to offer 30-day terms to allow this to be done. We live in an age where payment can be made immediately by bank transfer, card payment or direct debit. This custom would seem to be out-dated we can make payments so instantly and so easily.
7-day payment terms are more acceptable now payment can be made instantly
It would seem that instead of giving the client time to pay you are in fact offering them a period of interest free credit, instead of them using their borrowings they are using yours free of charge. It would be acceptable now to state payment terms of 7 days to give them time to make payment.
Can I invoice when a project milestone is passed?
Waiting until the end of the project to invoice seems unfair. It would seem that you should place payments in the sales contract for milestone payments. Breaking down the project gives you the chance to receive payments as you pass key moments in the project, it also gives the client chance to approve the work so you can move on to the next step. There is no point in spending time on a project to be told the client is not happy and have to redo the work.
Do you checks on a client before you take them on!
The collection process can also begin before you actually start doing work for them. As part of the initial consultations and client take on you should also be doing your due diligence on the client and trying to decide if the client is creditworthy, can they afford to pay your bills? If it appears that the client is having financial problems and you still want to do the work, perhaps you may want to ask for payment to be made upfront before you start work.
This is also something that you may wish to ask for each client. You may want to ask for a deposit to start work. This shows the client commitment to the project and gives you security that you will be paid.
Get your invoices right and make the collection process easier when it begins
When you invoice a client, it is important to make sure that you do it correctly. When you send the invoice make sure that their details are correct and make it clear what you are invoicing for, who the invoice is sent to, what work you are invoicing for and time have you spent working for them. You may want to include a record of this to show them what value for money service that you are giving to them.
Make it easy to pay your invoices
Making your invoices easy to pay is essential. What do I mean by easy to pay? Does the client need to go looking for their chequebook, take the payslip to the post office and send to you? Or can they click on the link on the invoice and pay by card? Chances are if it is the former they will wait until another day to do it, if it is the latter they will more than likely do it straight away.
The right software will help you do this
This can be very easy to set up. Integrating Xero or QuickBooks with payment tools like PayPal, Stripe or Gocardless can make the payment process very easy for the client. Make it easy for them and they will do it straight away, introduce too many hurdles and they will leave the invoice in their inbox for another day.
Gocardless and Direct Debit can be very useful if you want to get your clients to pay for your services on a monthly basis, if for instance you breakdown the cost of the project to be paid evenly over the duration of the project. Monthly payments makes it easier for the client to pay and also makes sure that by the time the project is done it is paid for.
What happens if they still don’t pay?
Sometimes as good as the processes are we put in place bills will still go unpaid. If this happens we have to make sure that we continue to chase payments for these. This may be an oversight on the client’s part and all it needs is a quick call to ask them for payment.
There may be a case of waiting for the client to be paid and then they will pay your invoice. This may be very common and if it does happen, asking when you can expect to receive payment is the best option. If payment does not happen on that date a call to check there is no problem and to check when it will be paid.
Try to understand the reason for not paying?
Keeping the lines of communication open over this time is essential. Remain in contact with your client, be polite when you speak to them and try to get dates when the payment will be made and follow up if it is not. I like the personal contact in this process and if done correctly it can strengthen the relationship you have with the client. If you show compassion when they need time to pay it will be remembered and your relationship will be all the better for it.
Can I take further action if I am not paid?
You will at some point find a customer that will not pay an invoice no matter how much you try. The invoice will remain unpaid. What do you do in these circumstances?
You are entitled to charge interest for late payment of invoices and this should be included in your contract terms to encourage clients to pay on time.
If payment is not made you can stop any current work you are doing for the client until payment is made and if there is a need for the client to get this work done that maybe enough to get payment made.
Check your contract terms
One thing that you may wish to look at is the contract terms that you are giving to clients. It is normal practice for the copyright for creative work to remain with the author. You may look to include a term that states that copyright to use your creative work only passes to the client once payment is made in full.
You can then stop the client using any of the creative work that you have made for them until they pay your invoice in full.
Taking Legal Action
If all else fails you may have no alternative to proceed to further action. You can use debt collectors or start legal action against the client to recover the monies owed. It is likely that if you proceed to this step that the client relationship will be broken. This is not a step to be taken lightly.
You can in the first instance try to use a firm of debt collectors to recover the money for you. Having professional debt collectors chase payment may push the client to make payment. Normally just the thought of a debt collection agency would be enough to push the client to make payment.
The other possibility is to consider taking legal action to recover the debt form the client. This is the ultimate action that you can take to recover the debt. Doing this in will almost certainly destroy the relationship, but if you have got to this point. Would you want to work with a client that does not pay their bills?
Taking this action does come with a warning. If the client is refusing to make payment it might be for a reason. They may be dissatisfied with the service that you have given them. Starting the legal action against them, may provoke them to make a counter claim against you. They may respond to your claim for money with a claim against you for damages. So, this is a process that you should undertake with extreme caution.
Get legal advice!
We would at this point advise you to take legal advice to find out exactly what you position is and if it is worthwhile to follow this up with legal action. They can help you on the process to follow so you can be sure that you are following the right procedure and file the papers for court action correctly.
How we can help?
We can help you make sure that the processes that you have to collect your debts are working for you and you are getting paid on time. We can make sure that the invoices that you are sending out are correct and are easy for your customers to pay.
We can make suggestions to your current debt collection process and give you a structure to work through to make it as effective as possible. Suggesting parts that can be automated using software and when you need to make personal contact with your customer.
Get in touch!
If you need help in keeping your debtors in check and want to discuss how we can help you collect debts faster please book an appointment so we can chat about this. We can help you get in place the right processes to make collection easier and advise you how to make use of the money when you have collected it in to help your business flourish.
If you want to chat please book a free consultation with us to find out how we can help you.