Tens of thousands of companies go bankrupt every year because of this.
They are a significant obstacle to business development and an explanation of sluggish growth in regions like southern Europe.
Businesses are penalize the most by late payments, even more than unpaid invoices. Overdue invoices massively affect their cash flow and their profitability because of financial costs of outstanding invoices.
As an example, only 32% of bills are paid on their due dates in France!
The fight against late payments is a must to sustain its company and its financial capacity to develop the business.
How do companies that minimize their bills overdue?
The rules to be followed to reduce overdue receivable
- Anticipate the risk from the trade negotiations.
This step is often overlooked when it is absolutely necessary. Indeed, the assessment of the creditworthiness of the buyer, its organisation (what is the process of validation of supplier invoices?) and its willingness to pay invoices (Does this company always meets its commitments?) has to be performed ahead of the completion of the sale.
- Secure payment with the proper tools
The solvency analysis helps identify risks that need to be mitigated. If the buyer has a strained cash, the sale should be covered with a bank guarantee, a letter of credit, a credit insurance or a surety like a parent company guarantee. In case of export sales, country risk can be covered with a specific insurance or better payment terms which provides a consistently positive cash curve if associated with contractual clauses such as a suspension and termination clause.
- Invoice right the first time and at the right time.
Make sure the billing process complies with the rules in force in terms of content of the bill and that it is issued upon shipment of equipment or execution of of service delivery.
- Handle any dispute first.
Major cause of late payment of invoices, disputes (issue on goods delivered, administrative problem...etc.) should be treated with the utmost priority, either for financial reasons or customer satisfaction.
- Perform preventive reminders (before the due date of invoices) every time it is suitable.
The purpose of debt collection is to be paid at the maturity date of the bills. It is therefore necessary to remind the client before the due date in order to get a promise to pay or identify early a dispute if any.
- If overdue invoices, perform a precise and rhythmic recovery process oriented to the good contact.
Understand the reasons for the delay in payment. The debt collection is an art that has a lot of rigor. Customers reminders are made â€‹â€‹in a timely manner in accordance with an established collection process and the latest exchange with the client. It is becoming tougher and demanding while allowing only way out to the debtor: the payment of claims.
- Require the payment of late payment penalties in case of regular overdues.
The application of legal provisions relating to late payment penalties demonstrates professionalism in the management of accounts receivable and gives credibility to the collection actions performed.
- Limit debt collection to a period of 60 days (except in cases of unresolved dispute).
Except in case an agreement on a payment schedule that will be contracted is done, the amicable recovery phase of the customer does not exceed 60 days after the due date of the invoice.
- Send a letter of formal notice at the end of amicable collection.
Beyond 60 days of amicable recovery, sending a letter of formal notice to the debtor means that without payment, the collection of the debt will be done through the appropriate legal means (legal proceeding, collection agency...etc.).
- If no payment after the given deadline, immediately perform a legal action either directly or with a partner (credit insurance, debt collection, lawyer ... etc..).
If the lawsuit is not necessary all the time, it nevertheless remains the ultimate means to succeed. The change of contact (debt collection, lawyer) often encourages the debtor to pay his bills because of the psychological impact it generates. Nevertheless, many experts of debts collection are available on the market to help a company to get paid by a bad payer.
In order that the same causes do not produce the same effects, it is essential to understand what are the fundamental reasons for late payment: poor assessment of the creditworthiness of the buyer, lax collections, administrative problems ... etc, and then take corrective actions.
This analysis and correction work allows to continuously improve the quote to cash process of its business and to increase its financial performance.
The key is to understand that the fate of the unpaid does not exist, and that the seller can avoid much of late payments which penalize its financial performance by being an actor at every stage of the customer relationship.