Receivables management: how to avoid non-payers

An unpaid invoice can sink even an otherwise healthy company. Good receivables management is therefore not just about collecting debts, but above all about prevention that reduces the likelihood of a customer owing you money in the first place. In practice, it is a system that starts even before the first invoice is issued and continues until it is paid. The more carefully you set up this process, the less time and energy you will spend chasing money that is rightfully yours.

Prevention is cheaper than collection

The best receivable is one you never have to collect. So vet new customers and, for larger deals, find out about their payment discipline. A few minutes of checking can save you months of chasing money.

• Check your business partner in public registers.
• For larger orders, consider an advance or payment up front.
• Set a limit on the amount up to which you will grant deferred payment.

Clear contractual terms

Many disputes arise from ambiguity. In the contract or order, state precisely the price, the date and method of payment, the payment term and the consequences of late payment. When the customer knows in advance, in black and white, what will happen if they do not pay, they usually pay more reliably.

Invoice quickly and correctly

The sooner you issue the invoice, the sooner the money can reach you. Make sure the invoice contains all the required particulars; otherwise, you give the customer an excuse to delay. Automating invoicing reduces both errors and delays.

Monitor due dates and send reminders systematically

Receivables need to be recorded on an ongoing basis, and you need to know which ones are overdue. A gentle reminder before the due date, followed by escalating reminders, has proved effective. Consistency is important: if a customer finds that nothing happens after the due date, they will stop hurrying.

When negotiation fails

If an amicable solution does not work, tougher steps come next. Before going to court, it is worth trying an instalment agreement or an acknowledgement of debt, which will strengthen your position. Collection through the courts and enforcement is only the last resort, and it tends to be lengthy and costly. This is another reason why it pays to resolve every dispute first through communication and by seeking an agreement, which is faster for both parties than proceedings that last for years.

Encourage timely payment

Besides penalties for late payment, positive motivation also works. Some suppliers offer a small discount for payment in advance or for early payment, gently steering the customer towards paying on time. It also helps to make paying itself easier, meaning a clear invoice with the correct details, several payment methods and a reminder before the due date. The relationship with the customer is important too. When you maintain polite but consistent communication, the customer knows that you keep a close watch on your receivables, yet does not feel that you are treating them in a hostile way. This balance between flexibility and consistency tends to be the most effective in practice and helps maintain good business relationships even during debt collection.

A system instead of improvisation

Receivables management works best as a regular process, not as firefighting. Set clear rules on who monitors due dates and when, when reminders go out and when a case is escalated. An accountant will help you set up this process and regularly prepare an overview of receivables, so that you always have an up-to-date picture of who owes you and how much.

Related articles: Trade credit insurance: protection against non-payment, Financial indicators every entrepreneur should track, Business financing: loan, leasing or factoring.

Frequently asked questions

How should I vet a new customer?

You can cover the basics through public registers, where you can find out whether the company exists, whether it has debts to the state and whether it is in bankruptcy. For larger deals, its payment history and references from other suppliers will also help.

Is it worth taking the matter to court straight away?

Usually not. Collection through the courts tends to be lengthy and costly, so it is worth trying reminders, personal communication and an instalment agreement first. Going to court is only appropriate once an out-of-court solution has failed.