Having appropriate debt recovery procedures in place is important for any organisation. Slow and non-paying customers place a heavy strain on cashflow reserves meaningless funds are available to pay your own bills and grow the business.
When starting out, many businesses establish a procedure for bringing in their receivables which get them by. However, despite taking on more clients, extending greater amounts of credit and dealing with higher overheads of their own, they fail to progress to a more sophisticated system and persist with deficient processes. The result of inadequate debt collection and recovery procedures is lost profits, internal stress and friction in business relationships.
For this reason, businesses must be aware of the need to regularly review their debt collection and recovery procedures to ensure they are appropriate and optimised to meet the needs of their business as it then stands.
So how regularly are we talking?
Many businesses adopt the attitude that reviewing procedures to regularly will result in wasted time and energy. However, failing to review regularly enough may result in the issues mentioned at the outset, causing business efficiency, realisation and profits to start tapering off. When this happens you have a hole in your bucket and it is going to continue to leak profits until it is addressed. Investing in an updated and improved debt recovery procedure will halt losses and boost cashflow.
For businesses who are not undergoing significant change or growth, a review of procedures every 1 to 2 years should suffice. However, a business may outgrow their debt collection system on a number of levels and situations could arise which demand a review of processes sooner.
Circumstances That May Prompt Sooner Review of Debt Recovery Procedures
- Your customers experience a financial shift. Customers may face adverse economic conditions or experience a financial downtown. This will impact how they pay their bills. They may start to give priority to creditors who have more stringent payment terms or who are more aggressive with their recovery methods, requiring you to bolster your recovery procedures.
- Your industry’s economy changes. Industries will often go through growth phases as well as troughs. This can completely change client risk profiles. Approaching the peak of a growth phase is an abundance of cashflow and credit can be extended more liberally. However, when such phases come to an end, the purse strings need to be reined in again. Businesses need to reassess their credit approval processes including credit limits and terms and conditions.
- Your business has grown or expanded. Procedures that are appropriate for a small business are not necessarily appropriate for a large business. It’s more difficult to keep track of arrangements with clients so more sophisticated and automated systems often need to be implemented so that important events and processes don’t fall through the cracks.
- Your accounts department has undergone a readjustment. Often established work protocols and procedures leave with departing staff members and new staff members either bring their own methods or figure something out along the way. This may create disharmony with other processes carried out by other departments or may cause some procedures to get neglected entirely.
While it may not be necessary to conduct a complete overhaul of your systems each time one of the above situations arises, a cursory review is necessary. Whether you do it by yourself or with the assistance of your debt collection firm or lawyer, the important thing is that you assess what you need from your debt recovery procedures and structure them accordingly to minimise your risk.