General Collection Methods

The most common collection methods are telephone calls and letters.  However very organised credit controllers are now using email and sending a general email to confirm the payment date every month.  Do not send the email asking if there are any outstanding issues with the payment or you will get issues where there were none before.

Letters are the most useful for a large number of small debts, due to the costs associated with telephone calls.  The calls though are more effective than any standard letter.  The telephone is most suitable for large problem debts.

Factoring and collection agencies are worth considering.  Beware that third party collections are more useful for problem debts and large amounts – they however put any good business relationship at risk.

In your conditions of sale have you retained the title of goods until payment is made?

  • Keep title to goods until payment
  • Charge interest on overdue payments
  • Payments by direct debit only
  • Minimum order for credit
  • Discounts

Settlement Discount

This is discount for early payment of invoices.  For example 5% settlement discount if paid within seven days or 30 days net.

If the discount is large enough it can be a powerful incentive for customers to pay early.  This method can be used to give a quick cash boost to a company, as the effect is to bring forward debts.  However there are more problems with settlement discount than advantages.

Many companies will take the settlement discount even if they are outside the time allowed.  The administrative cost of this is enormous.  Are you willing to have credit controllers spend time chasing up very small percentages of outstanding invoices?

You must have very well trained staff that are able to part allocate payments precisely, additionally you must have accounting software that can deal with part payments, (most will now).

Using a settlement discount systems the debtor’s ledger often becomes very messy and it needs an unreasonable amount of time at some point to reconcile these accounts.

When a customer takes a discount without entitlement it will cause customer relation problems and many arguments.  Companies will cite various problems for applying late and still taking the discount: delivery problems, no invoice received; these have to be investigated which adds valuable time on to the credit control function.

The last issue with settlement discount is once introduced it is almost impossible to withdraw, and therefore if you find that it is not helping cash flow you can end up giving away money for no return.

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