A deterioration of payment behavior could spell big trouble for companies that fail to recognize the decline when it happens. The good news is there are lots of proactive measures that can be done before disaster strikes.
What to Do
Analyze payment behavior among customers. Consistently compare current customer payment trends to historical trends. Are days outstanding increasing? Are credits increasing? It can be easy to overlook an occasional late payment or nonpayment by a usually conscientious customer. However, if nonpayment is becoming a trend for some customers, it’s vital to nip things in the bud. The direct approach is best; communicate with customers to find out what’s going on and express concern.
Some difficult decisions will need to be made; if a customer is long-standing and just going through a difficult time economically, the company might want to make special arrangements for a payment plan until the customer gets back on its feet. In other cases, it may be necessary to cut one’s losses and cut a customer loose. Such decisions will require a great deal of discussion and analysis on the part of the company’s finance team.
Change credit arrangements. Review current credit terms for all clients on a regular basis. The economy changes as well as a customer’s financial situation. Thus, at least an annual review of all customer’s credit terms is a proactive practice.
Collect more quickly. Companies should consider implementing a policy to collect as soon as receivables become past due. Also, a courtesy call when the invoice is still under 15 days outstanding can confirm the invoice was received and is in the process of getting paid. One of the biggest reasons an invoices is not paid on time is the invoice was never received by the correct party. Remember, the longer an invoice is outstanding the less likely it will be paid. A well thought out collection policy can ensure invoices are paid timely and write offs are greatly reduced.
Put in place more thorough risk management policies and procedures. Be more diligent when extending credit and to whom. There are many credit services available that can offer trade payment reports which can assist in evaluating a customer’s credit worthiness. Utilize these services as well as getting bank and trade references. The more due diligence done on the front end will mean less effort to collect on the back end.