Would you like every single one of your customers to pay you in full, on time, every time?
Expert in a box
? We have produced an insider report containing eight powerful ways to get paid quickly – ways that you probably won’t find in any textbook!
? We have also written a “Getting paid checklist” that contains 43 other simple and practical ways to collect what you are owed.
? Both documents are attached
When you keep your side of the bargain with a customer, it is only fair that they should keep
theirs by paying you... and paying you on time. Sadly, as everyone in business knows, this
doesn’t always happen.
How big is the problem?
The bad debt calculator below shows you how many extra sales you will have to make in order
to recoup the profit you lose on a single bad debt. For example, if your profit margin is 10%,
and a ?5000 invoice is not paid, then you will have to make another ?50,000 worth of good
sales to make up the profit lost on the one bad sale. Shocking, isn’t it?
Your profit Bad debts
% ?100 ?1000 ?5000 ?10,000 ?50,000 ?100,000
1% ?10,000 ?100,000 ?500,000 ?1 million ?5 million ?10 million
3% ?3,333 ?33,333 ?166,666 ?333,333 ?1.7 million ?3.3 million
5% ?2,000 ?20,000 ?100,000 ?200,000 ?1 million ?2 million
10% ?1,000 ?10,000 ?50,000 ?100,000 ?500,000 ?1 million
15% ?666 ?6,666 ?33,333 ?66,666 ?333,333 ?666,666
20% ?500 ?5,000 ?25,000 ?50,000 ?250,000 ?500,000
30% ?333 ?3,333 ?16,666 ?33,333 ?166,666 ?333,333
40% ?250 ?2,500 ?12,500 ?25,000 ?125,000 ?250,000
50% ?200 ?2,000 ?10,000 ?20,000 ?100,000 ?200,000
Why does it happen?
In their 1999 survey, business finance specialists Alex Lawrie asked UK companies why they
paid invoices late. The top ten reasons given by credit controllers were as follows:
23% Waiting for the cheques to be signed
22% Invoice lost
16% Cashflow problems
15% Person dealing with it is unavailable or off sick
6% Cheque is in the post
5% Waiting for the cheque run or for a new cheque book
3% The invoice is being disputed
2% We pay on 60/90 days – not 30 days
2% Missed the payment run
On a lighter not, some of the more bizarre reasons given by credit controllers when refusing to
? “The owner has been buried with his cheque book”
? “All names are put in a hat. If yours is drawn out you get paid. If not it stays in the hat for
? “I do not speak English”
? “We’re in the middle of an armed robbery”
? “Not now, its the office party”
? “The tide is out and the owner is unable to get in to pay cheques”
What can you do about it? Some unusual ideas that really work....
1 Big prompt payment discounts – Most prompt payment discounts don’t work because the 1%-5% discount traditionally offered is not enough to galvanise customers into action.
So a Leeds based business we work with gives its customers a massive 33% settlement
discount. But just look at how it does it.... it’s main product has a list price of ?3000,
which it is usually prepared to discount down to ?2000. But rather than make that ?1000
reduction a "sales discount", it makes it a “prompt payment discount”.
In other words, the invoice shows the price as ?3000, but also contains a line that deducts
the ?1000 and reads: “This ?1000 prompt payment discount may only be deducted if payment is received at our office no later than...” followed by a date exactly 7 days from
the invoice date. As a result the vast majority of customers pay within 7 days. Why not
turn your sales discounts into BIG prompt payment discounts in this way?
2 Increase you prices – Another business we know wrote to all its customers telling them
that that it was increasing all of its prices by one ninth (ie 11.11%). But in the same letter
it also explained that customers paying within 14 days of the invoice date would be able
to deduct 10% from the invoice value. Nobody complained, and most of its customers
now pay within 14 days. What’s more, and here’s the amazing part, customers now
actually come in to say “thank you” for being allowed to pay less by paying early!
Of course, when you look at the maths you see how clever this particular strategy is.
Initially a ?100 item goes up to ?111.11. So those who pay after 14 days pay the full
?111.11. While those who pay within 14 days pay ?111.11 less the ?11.11 prompt
payment discount – which comes back to the ?100 they used to pay before the price rise.
So either the business gets paid more or it gets paid more quickly – and either way its
owners are happy!
3 Prompt payment benefits – Discounts are not the only way you can motivate and reward customers for paying you promptly. There are many other benefits that you could
reserve only for those who pay on time. For example, you could give them priority when
booking service and repair visits, free upgrades to express delivery, or even free delivery,
lower minimum order quantities, extra technical support, free helpline, special offers on
upgrades, discounts on their next purchase, access to a special section of your website,
extended warranty terms, membership of a user group, advance notice of new products
or whatever else is most relevant in your case. The key is to make these benefits exclusive
to customers who pay on time, because that way many more of your customers will pay
4 Prompt payment club – Taking the last idea one step further, why not bundle all those exclusive benefits as part of a prompt payment club – which customers are automatically
members of if they pay on time. And perhaps give it a name like “Integrity” – since that
helps all your customers to see that, when they demonstrate high integrity by paying you
on time, they will get special priviliges. It will also help them to realise that by paying late
they are acting without integrity.
5 Payment upfront – Another powerful approach is to insist on payment upfront. A useful
way of explaining this is to say: “In order to ensure that we have sufficient resources
available to continually improve the level of service you receive, our policy is not to ask
our good clients to subsidise the handful of clients who abuse credit terms by not paying
promptly (and, in some cases, not paying at all!). As a result our standard terms are that
payment is due when we start the work.”
6 Offer finance – Some retailers (car dealers and white goods retailers in particular) offer
to arrange finance for their customers. But most others don’t. And that is all the more
strange considering that finance allows the business owner to make more sales (because
more people will be able to afford to buy), get paid quickly, and perhaps even share in the
profits made by the finance company. There are now many specialist finance companies
offering many different types of finance options. For example many professionals now
offer their clients the opportunity to pay in instalments by signing a simple agreement
with a finance company – and because it is what is know as “recourse financing”, there are no processing delays, very low rates of interest, and the finance company guarantees
never to turn down an application. Why not explore whether you can arrange something
similar for your customers?
7 Regular clients pay by Standing Order – If a client is charged a regular weekly, monthly, quarterly or even annual amount, set up a standing order to ensure that you are not
regularly chasing payment. (Standing Order template is enclosed in this document).
8 Using humour – Humour is a great way to defuse difficult situations – including asking
to be paid. Some businesses use funny cartoon postcards and faxes to chase debtors.
Other use amusing letters. For example, the text given below (which works best as an e-
mail, but can also be used as a letter) gets extremely good reactions and results.
My name is BRIAN and I’m the Bloggins & Co software.
I’ve got some good news, some really good news and some even better news for you.
The good news is that, at the moment, only you and I know that your invoice for ?XX
(ref: XX, date) is overdue.
The really good news is that I am not programmed to tell [insert partner’s name] about it
for another seven days.
And the even better news is that I’ve discovered a way for us to sort it out between
ourselves without involving him.
All you need to is send me cheque in the next seven days and I will erase the overdue
record from my hard drive. That way no-one else need ever know.
1 New customers
Do you have a standard credit enquiry form – 1.1 and is it used for every new customer?
1.2 Do you always get full contact details? 1.3 Do you always take up trade references? 1.4 Do you always get bank references? 1.5 Do you always do a credit check? 1.6 Do you always set a credit limit? 1.7 Are credit terms always agreed in writing?
Do you always use your own standard (and 1.8 expertly written ) terms of trade?
Do you use a credit monitoring service for
1.9 major customers to give you advance notice of
any changes in their credit worthiness?
Do you always get a written order from the 2.1 customer?
Do you always make sure that the order form
small print doesn’t attempt to change any of 2.2 the previously agreed terms of business? NB:
This is known as “The battle of the forms”
Where the small print on the order form does
differ from the agreed terms, do you make 2.3 sure that the differences are resolved in
writing before accepting the order?
Do you always check whether the order will
2.4 take the customer over their credit limit – and
refuse to take orders that do?
2.5 Do you always get and keep proof of delivery?
Do you always make sure that the details on 2.6 your delivery note are accurate?
Do every single one of your invoices include
ALL of the following details:
? Customer name and address
? Address to which payment should be sent
? Terms and conditions
? Purchase order details - name, number
and date 3.1 ? Description of items supplied
? Quantity details
? Price details and discounts given
? VAT rates, calculations and totals
? Your VAT number
? Total amount due
? Date payment is due by
? Payment terms
Are invoices raised the day goods are 3.2 delivered?
3.3 Are invoices sent on the day they are raised?
Do you double check that the delivery is of
the right thing, in the right quantity, to the 3.4 right place and at the right time... in order to
avoid invoice disputes?
Are all invoices double checked for accuracy 3.5 before being sent?
When sending large invoices do you always 3.6 confirm that they have been received?
Do you always have an accurate and up to 4.1 date aged debtors listing to refer to?
Do you phone customers before large invoices 4.2 are due to make sure there are no disputes?
Do you always chase overdue debts within 7 4.3 days of them becoming overdue?
4.4 Do you chase the largest overdue debts first?
Do you have a set of letters and telephone
4.5 scripts that get progressively firmer as the
debt gets older and older?
4.6 Are they used every single time?
Do you have a clear policy on when to use a 4.7 solicitor or debt collection agency?
Do you always pursue claims through to the 4.8 courts where necessary?
Do you have a system for resolving delivery 4.9 and invoice disputes quickly?
Do you keep a log of all “explanations” that
4.10 can be referred back to quickly before each
stage of the debtor chasing process?
4.11 Do you send statements every 14 days?
Do you bring the non-payment of an invoice
4.12 to the attention of the actual user as well as
the accounts department?
Do you hold a monthly prize draw for prompt 4.13 payers?
4.14 Do you offer large settlement discounts?
Have you thought about putting your prices
4.15 up by one-ninth, but offering a 10% discount
to customer who pay within 14 days?
Have you created a bundle of other benefits 4.16 exclusively for prompt paying customers?
4.17 Do you ask for payment in advance? 4.18 Do you use humour to help you chase debts? 5 Other 5.1 Do you use factoring and invoice discounting?
Do you report to senior management the
5.2 debtor days, amount of overdue debt, and the
percentage of total debts that they represent?
5.3 Do you accept credit cards?
Do you arrange external finance for 5.4 customers?
STANDING ORDER MANDATE
To: The Manager
[Type payees bank name here] Postal address:
[Type payees bank address here]
[Type recipients bank name here] Please pay:
[Type recipients bank address here]
For the credit of: [Name of recipient]
Account Number xxxxxxxxx
Sort Code xx-xx-xx
[Type the monthly amount in numbers AND The sum of:
Commencing on [day] [month] [year] and thereafter every [day] day of the
month until further notice and debit my account accordingly:-
Account to be debited: [Payees bank account name]
Account number: [Payees bank account number]
Sort code: [Payees sort code]
This Standing Order Mandate supersedes all previous standing orders to
[Name of recipient company]