Best Practice in Debt Collection

How do the best companies manage their debt collection? Many companies believe that their debt collection performance is entirely a factor of their clients' willingness to pay. This article seeks to dispel this myth and advises readers how to put themselves firmly in control, giving examples of what has worked well for organisations across a range of industries.

Define your objectives

In determining your collection strategy, it is vital to support the corporate objectives of your company. For example, if you are the market leader in your industry or are producing a unique product, you will be more readily able to dictate payment terms as, put simply, if clients do not pay they do not get the goods!

However, competition is the norm and flexible payment terms are sometimes used as a differentiator to win and retain business. In such situations assertive collection techniques can cause problems and you can only take control by removing the reasons for non-payment.

Billing

The billing requirements of your clients should be taken seriously. So many organisations fail to take account of what their clients want, and do so at their cost. The best performing companies implement the following simple strategy:

* Listen to what clients want;

* Be honest with the client about capability to deliver client requirements;

* Agree billing mechanism.

Ask how you can make it easy for your clients to pay - before the bill is disputed. The best time to ask is at the point of setting up the account, so you can build in quality processes from the outset of the relationship.

Billing quickly

Billing quickly and accurately will go some way towards taking control of collections. Best practice suggests that invoices should be raised and despatched within 24 hours of delivery. There are two traditional methods of billing: proof of despatch and proof of delivery.

Proof of despatch is where the supplier produces a delivery note and/or invoice based on what he believes has been despatched to the client. One pharmaceutical distributor with which we have worked sends a single document which serves as an invoice and proof of delivery when despatching goods to the client. They have a requirement that damages or shortages are advised within 72 hours, so in theory the client cannot make a claim beyond these three days. This supplier has put himself very much in control of the process.

* Proof of delivery is where the supplier despatches goods but does not produce an invoice until the goods have been delivered and a proof of delivery returned. Managing the time between the goods being delivered and the invoice being despatched to the client is the key challenge, with control more readily achieved if distribution is managed in-house. Difficulties can arise where third parties are used for distribution as timing delays between delivery of the goods and return of proofs of delivery can be significant. One large food manufacturer overcame this by using a service level agreement with their distributor, which included penalties for late submission of documentation.

A third, more efficient means of billing which can greatly reduce the cycle time between delivery and invoice despatch is electronic data interchange (EDI) (see fig. 1). EDI allows the supplier and client to communicate prior to delivery, checking prices electronically and registering order details. The client can flag up pricing -and order discrepancies before delivery to prevent mistakes being made. Following receipt of the order, the client will electronically notify the supplier of the goods received and the supplier will produce an invoice based on these details. The supplier may then transmit a remittance advice to the client and receive payment, all electronically. EDI does however entail a significant investment in infrastructure, and it works most effectively where the buyer and seller have established a strong partnership.

Another alternative, perhaps more visionary, is electronic bill presentment and payment (EBPP). This replaces paper trails (e.g. traditional invoices, cheques or remittance advice) and manual processes with highly automated business functionality using web technologies. EBPP allows for the delivery of richly formatted invoices linked to related documents, such as statements, payment advice or bank statements.

Clients using EBPP can view bills and make payments at their convenience. The web offers more information and enhanced client service features than a printed invoice or statement. Each item on electronic statements can be linked to further information. For example, a client can easily compare the current month's bill to the same month a year ago. With web enablement of existing back-end systems and security-- enhanced access policies, this technology can give your clients controlled access to the data they require. All this can be achieved for a fraction of the cost inherent in the establishment of EDI infrastructure. The burden of accessing data will be placed on the client, and to be successful will require a high level of buy-in to this approach from them. Client relationships will need to be clearly defined to ensure that they are aware of their obligations to access data and to make payments in line with agreed terms.