| What is debt collection? | Debt collection involves deploying an action plan to obtain payment of an unpaid invoice. |
| What are the different debt collection procedures? | Debt collection can take the form of an amicable procedure (reminder, formal notice, payment schedule, conciliation) or a legal procedure (injunction to pay, provisional injunction, etc.). |
| Why have a debt collection strategy? | Having a collection strategy in place means you can limit the risk of non-payment, and react quickly and effectively in the event of non-payment. |
| What is the statute of limitations for debt collection? | The limitation period for unpaid invoices is 2 years for private customers and 5 years for business customers. In both cases, the limitation period begins the day after the invoice’s due date. |
Debt collection represents a strategic and financial challenge for companies. Anticipating and managing unpaid debts means reducing cash flow shortfalls and avoiding losses. That’s why mistakes in debt collection can result in substantial financial losses for the company. So, how do you go about debt collection? The first thing to do is to avoid these 5 mistakes, so that you have an effective collection strategy and can reduce the time it takes to pay invoices, thus ensuring your company’s financial health.
Mistake #1: failing to define a clear collection policy
If you want to implement an effective debt collection strategy, you need to make sure you have a perfectly clear collection policy.
Indeed, the absence of a collection policy, or a poorly drafted one, entails a number of risks. First of all, you increase the risk of non-payment of invoices because the terms and conditions of payment are unclear. What’s more, if the payment procedure to be followed is not laid down in advance, the people in charge of collection may improvise and therefore make mistakes.
On the other hand, by not establishing a clear collection policy, you expose yourself to an increased risk of disputes with your customers. Indeed, claims can quickly mount up if late payment penalties are applied, even though they are not expressly stipulated in the contract, for example.
And generally speaking, the absence of a good collection policy is a source of errors that can damage a company’s reputation.
To avoid all these inconveniences, it’s best to draw up a collection policy and clearly communicate its terms from the outset of a business relationship. Transparency is one of the keys to an effective collections strategy. Indeed, if all terms and conditions of payment are perfectly clear from the outset, the risks of unpaid invoices and disputes are greatly reduced.
Don’t hesitate to involve your sales and collection teams in the drafting of your collection policy. This will enable them to enrich it if necessary, and apply it more effectively later on.
Mistake #2: failing to communicate with customers
Lack of communication is a serious mistake when it comes to billing management and debt collection. It’s vital that your customers are fully aware of the terms and conditions applicable to their contract. Failure to do so increases the risk of disputes. A debtor who doesn’t understand the charges on his invoice is an unhappy debtor who is bound to let you know. And managing disputes can be time-consuming, energy-intensive and costly for the company. In the long term, this can increase customer dissatisfaction and lead to a deterioration in customer confidence.
So how can you avoid this mistake when it comes to debt collection? The best thing to do is to implement a proactive communication policy right from the start of the relationship with your customers. In particular, this means ensuring that sales staff are well-informed as soon as they enter into a relationship with the customer, as well as regularly reminding them of the terms and conditions of the contract. Your transparency and support will undoubtedly be greatly appreciated by your customers. This is how a relationship of trust is built up over the long term.
Mistake #3: Reminding your customers too late
Many companies tend to dun their customers too late for fear of upsetting them. However, a late reminder can have several consequences for your company:
- cash flow pressures, as expected cash inflows are not realized;
- a risk that your debt will be declared irrecoverable due to the statute of limitations, resulting in financial losses for the company;
- a deterioration in the relationship with your customer, especially since you’re under pressure of time and risk making mistakes.
On the contrary, if you set up automatic reminders a few days after the invoice due date in the event of non-payment, you avoid all these risks. To do this, you can use debt collection software such as CashOnTime, which enables you to automate reminders to your customers in the event of non-payment of an invoice. In this way, you can improve the health of your cash flow through faster debt collection, while preserving your commercial relationship.
Discover the many features offered by the CashOnTime platform.
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Mistake #4: Neglecting personalization in your reminders
It’s a good thing to send out reminders for unpaid invoices. But for them to be truly effective, we advise you to personalize your reminder.
If your customer reminders are not personalized, they are likely to lack relevance. It’s therefore preferable to include elements of context specific to your customer, in order to gain efficiency in the recovery of unpaid invoices. This is all the more true since, if your customer has all the elements in hand to identify the invoice in question, and gauge the situation, it will be easier to proceed with payment quickly.
On the other hand, a lack of personalization in customer reminders can lead to dissatisfaction. A standard or generic reminder can quickly be perceived as impersonal and formal, and thus offend your customer. However, if the unpaid debt is simply an oversight, this situation should be avoided at all costs.
That’s why, to avoid losing customers through an impersonal approach to debt collection, we recommend segmenting your customer portfolio according to their profile. This way, you can easily personalize your reminders, even automatically. This is one of the features to look for when selecting your debt collection software. CashOnTime, for example, offers you this possibility, enabling you to optimize the management of your customer reminders.
Mistake #5: Lack of follow-up in collections
Finally, the last mistake to avoid in your debt collection strategy is a lack of follow-up on invoice collection.
As we’ve seen, it’s vital to send reminders to your customer at the right time. But the collection process doesn’t stop there. If the customer doesn’t respond, doesn’t regularize the situation in your books, or doesn’t propose a serious solution to the problem, it’s essential to monitor the progress of the case.
If you don’t monitor your debt collection regularly, you run the risk of :
- Exceeding payment deadlines, thereby increasing the risk of non-payment;
- exceed deadlines for taking action, including legal action if necessary;
- failing to detect signs of financial difficulties among your customers, and therefore failing to adapt payment terms (e.g., reducing contractual terms);
- fail to identify trends in your collection performance, and increase financial and legal risks.
On the contrary, if you set up dashboards to monitor your collections in real time, you’ll be able to make all the improvements you need to promote good debt collection.
For example, CashOnTime collection software gives you access to clear dashboards that bring together the key indicators you need to make strategic decisions such as :
- DSO (Days Sales Outstanding);
- CEI (Collection Effectiveness Index) and its trend;
- DBT (Days Beyond Term) and its trend;
- the ageing scale ;
- outstandings ;
- collection forecasts based on analysis of payment behavior;
- Litigation and customer risk KPIs;
- automatic lettering KPIs.
Conclusion
You now know the 5 mistakes to avoid in your debt collection strategy. For effective debt collection, you need to clearly define and rigorously follow a collection procedure. In addition, it’s essential to treat every customer with respect, in a personalized way, to avoid conflicts. In the event of difficulties, don’t hesitate to call in the experts to guarantee efficient, professional management of your debt collection.
