overdue invoice notice formal collection letter example 868 X 1104Healthy cash flow is the life blood of every business. For small businesses in particular, delays in receiving payments can result in perpetual debt problems and seriously impact on their ability to remain operational. Earlier this year accounting software firm Xero released figures stating that only about one in nine invoices issued by small businesses were being paid on time. Improving your debtor management begins with looking at your systems and putting procedures in place to reduce your age of debtors and protect your cash flow.

  1. Take a critical look at your number of credit accounts to see if these can be reduced. If you do offer credit, have a rigorous credit application process to identify those customers with reliable payment histories. If your business is new, don’t be over-eager to offer credit terms in order to gain customers – you may come to regret it.
  2. Do you accept credit card payments? These are a useful way of providing credit to customers while leaving the risk with the bank.
  3. Send out invoices promptly after the sale has been made – there is no need to wait until the end of the month. Emailed invoices and statements are cheaper and much more efficient than using traditional postage.
  4. What are your payment terms? Changing from the traditional “20th of the month following invoice date” to “payment within 7 days” can make a huge positive impact on your cash flow. For existing customers this may need to be phased in with appropriate advanced warning.
  5. Always follow up unpaid invoices promptly. If you delay in chasing up unpaid invoices it makes it easier for the customer to forget or ignore them. Have a process, such as sending an email reminder two business days after the invoice is due, followed by a phone call if there is no response within one week.
  6. If customers admit to having difficulty paying due to their own financial situation, consider letting them pay in instalments.
  7. Have terms and conditions of trade in place. If you supply goods you can grant a security over those goods to ensure the title/ownership of the goods doesn’t pass until you have been paid.
  8. If no payment is forthcoming your options then become taking legal action through the District Court (which can be expensive and time-consuming), or employing the services of a debt collection agency.
  9. Promptly stop supplying goods and services until all outstanding debts are paid in full.
  10. Do you know what your age of debtors is right now? You should monitor this regularly to ensure it falls/remains within your target, and take action to reduce it when necessary.

UHY Haines Norton’s Practice Manager Yvonne Wood has many years’ experience providing credit management services and advising SMEs on the importance of good credit management procedures.