What is the ratio of your bad debts to accounts paid?
These aspects of your accounts receivables can be your telltale signs. Consider them the specific Key Performance Indicators of your debtor situation.
Key Performance Indicators for Debtors
It is most important that these KPIs are continually monitored:
- Average days to payment (Debtors Days on Hand).
- Bad debts to accounts paid.
As Jack Welch, former CEO General Electric once said:
The three most important things to measure in a business are:
- customer satisfaction
- employee satisfaction
- cash flow
Now do the numbers for yourself.
- If you could reduce the time you have to wait for an account to come in by 10 days, say from 30 to 20 days, how would this affect your cash flow?
- What would happen if you collected 10% more of your fees before you started the work? Or instead of having a ratio of 20% collected before completion, let’s say you could change that to 30%. What would this mean to your bottom line?
- How would your clients react if, instead of hitting them with a bill for $3,000 at the end of the job, you had them on a 1-year payment schedule of $250 per month, which was charged automatically to their credit card?
- These improvements are possible. What effect do you think they would have on your bad debt ratio?
Now that it’s clear you can improve your existing debtor situation, let’s look at probably the most significant way to get the dollars you’re owed in your pocket.
Make it fun
Debt collecting doesn’t have to be a visit from the boys with bulging muscles, and more importantly, it doesn’t have to be perceived that way, either. You should make it a standard in your office to make debt collecting FUN!
A fun way to collect a debt reduces the possibility of upsetting clients. Remember, disgruntled clients will never come back, so don’t aggravate them—inspire them.
Here are some examples of ways you can make debt collecting fun.
1. Around the bank manager in 80 days
This idea originated at a courier company. It’s called a Prompt Payers Club. The club is for customers who simply pay their bills on time.
What’s in it for them? Every month the customers who are in this Prompt Payers Club are entered into a drawing. The winner gets their name published in the business newsletter.
You could easily do the same. You aren’t limited to just publishing the winner’s name, though. You might also promote the client by featuring a profile article in your newsletter.
In this example, the monthly winner in the Prompt Payers Club also receives a free balloon flight over the city. What does the balloon flight cost each month? Well, it might cost about $500, but it does secure a lot of payments that would have become debt problems.
Work out how much time you spend chasing debt and put a value to it. Certainly, it’s more than $500.
An interesting way to find a low-cost but valuable prize would be to look into your client base and see if any clients would like to promote their services or goods to your other clients.
For example, if a gym owner is a customer, why not arrange to give away a year’s free membership to that gym? Perhaps you know other exciting businesses with whom you could arrange a relationship?
If you collected your thoughts and approached some non-competing business people, you could probably organise a monthly prize that would be valued at thousands of dollars in your customers’ eyes.
If you consider all this a bit much, you could arrange for the monthly winner to be refunded the cost of their work.
Of course, these are considerable suggestions, so you really need to work out how serious your debt problem is and then DO SOMETHING ABOUT IT – AND HAVE FUN AT THE SAME TIME!
2. Change the wording, change the debt
A less dramatic strategy would be to modify the wording of your invoices from “payable within seven days” to a more specific call to action. Try wording your invoices with a due date for payment. For example:
‘Your payment would be appreciated by September 14.’
The owner of an Australian secretarial services business had a dilemma, probably not dissimilar to something you may have experienced. Her business was growing and thriving but she was experiencing the all-too-common cash flow problem—having to carry accounts. She had to pay her staff and overheads during the month, but her clients were taking 30 days or more to pay.
To speed up the cash flow from her customers, she originally added this line to her invoices: ‘This invoice is now due and payable within 7 days of date of invoice.’ Nothing happened. Clients clearly judged that ‘within 7 days’ really meant 30!
She decided it was time to do something about it so she put together a 3-step process.
Step 1: she replaced the ‘payable within 7 days’ wording to one that noted a specific date for payment. Her invoice then read as mentioned above: ‘This amount is due by September 14th.’
The effect of just that alone has been astonishing. People now pay within days of that specified date.
If customers are still reluctant, she moves to Step 2: a simple ‘with compliments slip’ reminder. This slip is hand-written and mailed in a stamped, hand-written envelope. More success!
In fact, she recounted that after mailing this friendly reminder, the accountant of one client company walked in personally to pay the bill!
And then Step 3. For those who are still slow to pay, she sends a firm ‘reasoning’ letter. Fact is, Step 1 and Step 2 work so well that she rarely has to send this letter!
3. Why not stick it to them?
This is another simple idea that makes a profound difference. Try using stickers with cute dialogues that convey a far more important message.
One business owner used just 2 different sorts of these stickers. One said, ‘Thank you, we really do appreciate the way you always pay your accounts on time.’ The second said, ‘Thank you for being such a good customer. We wish we had more like you.’
The results?
His account payments jumped a full 24%! Well worth the couple of bucks it cost to buy the stickers!
You can find a supplier of these sorts of reminder stickers in your area. Buy some and start using them. Again, they’re different, and they attract attention.
4. Buy back your hard-to-get debts from your clients
This idea originates from an Australian professional firm. Shane had some success with his slow payers. If they owe, for example, $5,000 for an extended period, he sends them one of his own real checks made out to himself for $500.
Shane then invites his debtor to use it as part payment for the amount outstanding. It works, and you must agree, better a 10% gift than a 100% write-off!
5. Reward your clients for doing what they’re supposed to do!
This idea comes from a NZ owner of a specialty printing business. The business specialises in printing embossed, gold-foil certificate blanks.Barry used one of his blanks to print up a high-quality Certificate of Appreciation, which was awarded& ‘For consistently prompt payment of your account within the normal trading terms’
6. A Radical Idea that Works!
Try ringing them up and actual asking them to pay their account!. This needn’t be as onerous as it sounds. Work on a script that works for you and your staff and also gets a positive response from the client. It can be witty and as imaginative as you like – as long as it works.
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