How do I collect overdue payments from clients?
I have a problem that I am trying to solve. Some of my customers are not paying their bills and we have to close our fiscal year. If they don't pay within three days how do I account for these overdue amounts. What are some ways to collect on these bills quickly?
What were the payment terms that were agreed upon when the contract was signed? Have you been able to reach them to ask why they are overdue?
The terms of payment are yours as the vendor / retailer.
The Counter party (customer) has signed an agreement to comply with those terms. You can therefore follow up on day 31 when the account/invoice was due.
This can be done by a simple request for payment letter (reminder) whether that be hard copy or e-mail. If that has no result then telephone the debtor, or if a firm speak to the Bought Ledger Clerk and request payment. It is at this point you will discover whether there is an issue relating to the payment of the invoice. That is to say the value is not as agreed in the contract, there is a question relating to the quality of the work and remedial work being carried out or a Credit Note to be issued.
Do not fall for the old excuse :" we need to process the Credit Note as well and that takes a further 30 days; that is their problem not yours. You have issued the correcting entry and you are entitled to your payment, how they deal with their accountancy is their problem not yours.
Then you have the proverbial "cheque is in the post", in which case you need to ask the date it was posted, where to and the amount of the cheque, and ideally the bank it is drawn on. For those who pay electronically BACS/CHAPs; their excuse is usually that they only do a Payment Run once a week. Which is fine but you expect those funds in your account 3 days after the run. Get them to confirm the date the BACS is to generated. The same goes for other forms of electronic funds transfer.
If payment does not arrive, then call them again and ask them where it was paid to and when it was released. If they give an answer, investigate it, and if still cannot be found go back and ask them for better information and whether it has come up on their "rejections list". Ask them to forward the funds by CHAPS (a same day payment system).
If the payment still has not arrived, then it is time to stop supply and issue a notice of intent to commence legal proceedings. Address this to the Managing Director, preferably by recorded delivery. Give them the time scale you expect the money to be received in the letter. Usually deemed to be 7 days from the date of the letter or a specific date in the body of the letter.
Finally if payment is not received, then it is time to consider legal action. If you are dealing with a limited company, then it is worth doing a quick check at Companies House to see their position in terms of filing and also if the last set of accounts have been filed, whether they are in fact viable to issue proceedings against, There is no point throwning good money after bad. Take the write-off.
Alternatively if it is viable, then issue proceedings in the County Court. Use Form N1, which is a Claim Form and enter your details, address (use your Regisitered Office if you are Ltd) and the same goes for the debtor (now referred to as the Defendant.
You will have to attach a "Particulars of Claim" which is basically a series of statements upon how the debt arose, the date of the contracts and the terms of payments and the nature of the breach of contract and any other information which is relevant to the case. This should be in numbered, bullet points on the Claim form. If there is not enough room, type it up on A4 plain paper and attach it to the Form N1. In the Form N1, where it asks for the details, just type in "refer to attached Particulars of Claim".
A Particulars of Claim should be in the following format:
In the (your local) County Court Claim Number: (the court will fill that in)
In the matter of:
Your company name Claimant
XYZ (Limited or otheriwse) Defendant
Statement and Particulars of Claim:
(See comment above about the information needed to show the claim).
After the lisitng of the grounds for the Claim, make a Statement of Claim:
The Claimant Claims:
1. Payment of the Debt £.....
2. Statutory interest at the rate of (currently) 8% per annum from the issue of this summons to the date of Judgement and thereafter at the same rate until settlelement of the Judgement debt. (if your terms and conditions have clause that the interest on default is higher, than you can put that in, but it is accepted protocol that you use Statutory Interest)
3. Costs (for the issue of the Summons)
(in certain cases you may have a claim for damages for loss of contract and that can be added here- however that should have been made clear in the core of the Particulars of Claim), alternatively you can ask the Court for "Damages to be assessed".
You will need the original forms, together with a copy for:
1. Each Defendant (if there is more than one)
2. A copy of the Court (the original)
3. A copy for yourself, which the Court will Seal (stamp) and provide you with a claim number. (You will need that for any correspodence between you and the Court; and if required communication outside the Court with the Defendant or their representative).
Fianally a cheque for the fee for issuing the Summouns (Costs)
Send the whole bundle to the Court you are issuing through by (preferably) recorded) mail, or you can hand it in to the Court if it is local.
The Court will then send the Summons duly sealed to the Defendants, and sent you back the copy with the Claim Number (summons number)
You will need to quote that everytime you contact the Court.
The Defendant (debtor) now has 14 days +1 (for letter box service) to reply to the Court to either admit the debt, or give grounds for a Defence i.e. why they do not owe the debt. If that is the case, you will be sent a copy of that defence for you to examine.
If you disagree with the Defence, then you can have the matter set down for trial before a Judge. These days if the claim is less than £5000 the matter is automatically heard by an Court Arbitrator, i.e. a senior person authorised by the Registrar (the person who adminsiters the hearings) to hear the case. Both Defendant and Claimant would be required to attend to give their oral reasons for non payment etc.
The person conducting the Arbitration will make a decision and issue an Order of the Court, whether the Debt is due or not, and if it is accepted that the debt is due then a Judgement will be entered on the terms requested by the Claimant, or the Judge/Arbitrator may give their own order as to payment, usually installments.
That is entered on the Court Register and copied to the Centre for Court Judgements (registstry) and usually notified to Credit Reference Agencies who have access to that data, as indeed other members of the Public.
Providing the terms of the Order are complied with and you make your payments to time you will hear nothing further. However, if you do not keep up the payment, the Claimaint has the right to demand payment of the arrears or payment in full (usually the former, unless the Judgement has stated otherwise). This is usually by letter. You are normally given 7 days to bring the Judgement up to date.
If you do not comply there are number of recourses available to the Claimaint and that would include:
1. Instruction of a Court Bailiff to seize goods to the value of the debt, or collect the arrears in cash.
2. If you are an individual and employee, not a business which is being sued, i.e. Defendant then the Claimant is entitled to apply to the Court for and Order to be made against you and monies taken from your salary to paid to the Claimant. That is sent to your employer and he is required by the Court to deduct the sum orderd from your final pay, and the money sent to the Court, who in turn will send that to the Claimant.
3. If the debt is very large, the Claimant is entitled to "Secure the claim" by way of a Charging Order on the property of the Defendant e.g. the House/flat for and individual or buildings if a Company, in both cases providing they are not rented.
If you fail to comply with the Order, in theory repossession of you property can be ordered. Any surplus funds from the sale being passed back to you. In effect you are now homeless. In reality most Claimants do not enforce, particularly Finance Houses and Banks due to the potential bad publicity, but also the effort in doing so. It is quite a drawn out and expensive process.
However, if you sell the property of your own accord to move to another area or leave the Country, the Sale Proceeds forwarded to your conveyancing solicitor by the Purchaser will be placed in to the Client Account of your Solictor. He and the other Conveyancor will check whether the debt has been "secured" and if so the monies due confirmed with the Court and the debt paid off; leaving you with any residual after the sale of the property.
Once the debt is cleared, you can apply to have the Charging Order be removed, and that is usually done by the Defendants Solicitor. In turn you should apply to the Court (there is no fee) for a "Certificate of Satisfaction" which is a brief letter from the Court, following confirmation with the Claimant that the debt has indeed been paid and is sent to you as evidence of payment. Also the Court Records will be ammended to show the settlement and the relevant Credit Reference Agencies notified.
However, the fact that you had a Judgement made against you for a debt stay on the Court, Credit Register, and if a Charging Order was granted, the details remain on the record for 6 yeaars after the settlement of the debt.
The fact that you have had a Judgement Order or default registered by the Creditor will affect your ability to secure Credit in the future, or at least you will pay a premium rate to borrow money in the future (six years at least).
It seems to me that you are using the accrual method rather than cash basis if your worried about closing your books for the Fiscal Year. I'm not an accountant, but I was an Accounting Major my Freshman and Sophomore years in college before switching to Economics then Political Science. I know crazy. My question is whether your more worried about it as a an accounting challenge or a collection challenge.
Collecting money is not the issue. It's why they that they can get away with not paying or paying late.
If that customer is valuable and expect repeat business, you need to use a smart approach such as advising your customer that you report your receivables to D&B, etc. If you do not wish to continue doing business then send him to a collection agency or at least warn him. Good Luck
Hi Kassandra & Rakesh, Regarding the accounting part of the question I can not help, other then get a good accountant that you can work with and trust. Regarding the collection I am a fan of a good tight policy or policies. If you are selling B2B for example and your terms are 30 days. When you sell the product or solution I would tell them verbally and make it clear on the invoice what your terms are. After a week I would follow up to confirm all is well then you can confirm they have your invoice and ask what is their process re payment. A week before it is due a email to confirm all is well with the product or service they have purchased. Also a gentle reminder the invoice is due next week. The day the invoice is due if you have not received payment you can call or visit the customer and ask for an update regarding the invoice. I believe it is critical to stay on top of the situations and never ever put it off with the hope that it will resolve itself. In my experience the longer you wait the worse it gets. Th other factor if there is an issue or concern that is something you would want to know.
Overdue payments are a chronic problem in professional services, which is why I've always advocated being paid in advance, even if it means a small discount. There are times when payments are late because of client cash flow problems (primarily in smaller businesses), or because invoices are lost, or because mistakes are made.
But late payments are usually a product of either overly bureaucratic rules being enforced or just sloth. When a client says "It takes 30 days to go through our billing cycle," in an age of computers, it really means that your invoice is sitting on someone's desk for 29 days. And every client can override a system to generate a check tomorrow. Can you imagine a senior vice president waiting 30 days for a paycheck? I think not.
When a payment is in violation of your terms for say, 30 days - then go back to your buyer on the 31st day. (If your invoice is due "upon receipt" as are mine, I allow a 30-day grace period for processing).
The letter on the next page is what you should send to your buyer. Don't argue with accounts payable or some processing clerk. Go back to your buyer.
I've provided two types of letters, one a gentle reminder and one a "last resort". I've had to on occasion use the first many time and the second rarely, but they're both important.
-Don't feel guilty or "pushy." It's your money and they are violating the contract they signed or agreed to.
-Follow up weekly until your buyer has a satisfactory answer.
-If you're not paid in 60 days, use the second letter.
-No matter what excuses you're offered, remember that you can't use them to pay your mortgage or your kids' tuition.
-If you're to be paid in installments, send an invoice for the installment 30 days ahead of time so that it can be produced on the due date.
Payment Overdue Reminder:
I need your help with something relating to our project agreement. Unfortunately, my second fee installment has not been paid, and it's now more than 30 days overdue. [Note: This can also apply to overdue expense reimbursements-ed.]
Would you please intervene with whoever is responsible in accounts payable to expedite this, and let me know what the status is? I know that you can probably do this in a few minutes, which is better than my making a dozen calls over the course of a few days.
Thanks in advance for your help. As you know, the project is going quite well, we're meeting all of our interim measures, and this is the only "glitch" to this point. I'll call you on Friday for our regular update, and perhaps you'll have some word by that time on this matter as well.
Payment Overdue Reminder 2 (one-time event):
Thanks for the opportunity to work with you and your people at the seminar. Your comments were very kind, and the audience was terrific!
Could you please help me with one remaining issue? I still haven't been paid the balance of my fee which contractually, was due at the time of the presentation. I don't want to arbitrarily start calling people, so I wonder if you might talk to the appropriate individuals in accounting and let me know when this will be processed.
Thanks in advance for your help. If I don't hear from you first, I'll follow-up on the 14th at 9 am by phone. Please call if you need anything else from me.
Payment Overdue Last Resort:
Note: Send this by FedEx or by email with a request for confirmation of delivery.
We have, unfortunately, a major problem which may significantly impact our project. As I've indicated, my current fee has not been paid on its due date and in fact is now over 60 days late, despite assurances of payment from you and people whom you've contacted, nothing has happened.
I know that you would not be able to tolerate the same behavior from your own customers, and I'm hoping that you can empathize with my position. But if I don't receive full payment of that installment by this Friday, I have no alternative but to stop all work on the project as of that morning. If that occurs, our schedule will be severely impacted since meetings, focus groups, field visits, and other activities will all be subject to rescheduling, and they were extremely difficult to put together in this time frame to begin with.
Naturally, I'd like to resolve this in the next couple of days, and I'm confident we can do that. But I must have my payment in hand by Friday morning or I'll have to call a halt to all work, including the sessions and interviews that are scheduled for that day.
Please call me as soon as possible to let me know what progress you've made.
With you being in Dubai so of the collection methods that will work in one place may or may not work there.
Accounting has some changes around the world but most are similar and are either a cash or accrual system. Ether way the fact you have not been paid should not create a problem in terms of closing your books.
The systems we use for our A/R are that in some cases we offer a 5% discount for payment in 10 days (net 30). We also have a 1.5% late payment fee for accounts that go past due. Sometimes getting an invoice at the end of each month for a finance charge will prompt them to pay.
Usually once an account is 60 days past due we will call them and try to get payment. Sometimes we call once a week or once every two weeks.
If we can not reach the accounts payable people or they make promises that they don't keep we will then send them a certified letter (return receipt requested) telling them that if they don't pay within 15 days we will turn it over for collection.
If we have not received payment in 25 days (the 15 days plus a 10 day grace period) we turn the account in to a collection agency which seems to have good success but does cost me 25% of the amount they collect. The other option I have here is to file a claim in small claims court which can be very effective and the small filing fee is added onto the amount they owe. I usually only do this with ones that are close to us since you need to appear in person both when you file and when the hearing is scheduled.
At the time of the transaction, you would have debited an asset account called "Receivables" and credited a sundry creditors account in the customer name. If the amount is not paid by the end of your fiscal year then that is the position. You don't have to collect before the end of your fiscal year.
However, you should try to encourage customers to pay up as soon as possible after the money is due.
You have two issues, one is an accounting issue to do with how you can accrue a receivable and your "close the books" issue with where you assign revenue. The more significant issue is to have a collections process at the end of your sales process (or what good was the sale?)?
Remember first there are three reason a bill does not get paid on time: 1) an oversight, 2) a payee has terms different than yours (ie they only pay after 45 days, 3) they don't want to pay either because they don't have the money, they feel they shouldn't pay or they think they can put off paying.
You can start with a carrot, it is not uncommon to advertise on an invoice a 1% discount for early pay (within 10 days say). Second, make your terms abundantly clear both on the sales contract/receipt and finally you can advertise a penalty for late pay. (If your terms are net 30, you get an additional 1% charge at 45 days and 1% more each 15 days.) Penalties can be tricky but can also be used as leverage ("I'll have the penalty waived if you can get payment in by the end of the week...").
Collection is the process you need to define. It might look like: at 30 days an email reminder, at 40 days a late notice. At 45 days a call from an associate and if that doesn't get satisfaction you do your enforcer step. That might be the Boss or someone who can sound both tough and understanding with the ability to negotiate options if required.
Point is the more passive you are in your process the more likely you will see payment issues, you may not have a guy named "Knuckles" who can twist arms for payments but strong conversation, willingness to be flexible and knowing when to be strong (and seek legal collection) all need to be processes in place for your business so you don't have deadline collections to close books, you have collections to get paid!