Collecting RECEIVABLES from CLIENTS - how important is it to be on time?

What should you keep in mind and what to include, as an activity for work from a financial process point of view? Whose commitment is the creation of this process?

What should you be careful about, at a minimum when working with clients:

• Strongly recommended - contract/written agreement in various forms, in which the terms of the deal, the object of sale /products, services/ are clearly written. Payment terms - amounts, prices, advances, terms, dates. Documents that will specify the date of the respective event /outside the invoice/ - protocols, receipts, and others. When working with larger volumes of sales or longer periods of execution - the contractual texts are necessarily consulted and coordinated with a lawyer from the point of view of regularity, as well as the risk of potential losses. A good practice is, if the deals are repeatable - to have a framework form of the content, with which you save a lot of time and reduce the risk of significant omissions.
• Mandatory inclusion of a clause in the contract/offer in case of delay in payment - how it is to proceed, as well as the same to increased appropriately for each day of delay after the date of the agreed maturity, as it is indicated with numbers with what amount /usually it is a number in %/.
• Negotiating payment terms - payment terms clearly defined, policy for deferred payment, policy for advances, policy for structuring the final payment - one-time, in parts, and terms for each. In case of additional expenses of the contractor, such as business trips, travel, work in extraordinary hours and days /if this is considered as extraordinary in the business itself/ - additional price conditions, which are explicitly and indicated, as well as the conditions of occurrence.
• Review of the receivables - according to the volume of transactions - both number and amounts - periodic review - both upcoming and past. It is advisable for larger volumes to be done daily /as well as the bank to be processed on a daily basis/, and at discretion it can also be for larger periods, but not more than a week for example. If the business has advance payments - the daily review is mandatory, as this is the basis for starting the execution of a given order, for example.
• It is good for a larger number of transactions to also analyze the process of collecting receivables - total, by clients, by periods, and other suitable criteria for the respective business.

Another important process is the management of overdue, as well as preventive measures. What could be done in this direction?"

Management of overdue or potential ones:

• Preliminary assessment by an experienced financier in the field of corporate finance for solvency. Don’t do it yourself if you don’t have the necessary competence or experience.
• If the company is large and serious amounts are going, such as cash flow, and if you often provide advances to your suppliers or start making an order for your client of great value, it is good to pay a subscription to a reliable platform for checking financial statements and data of potential partners, as well as collected reliable information about the functioning of the partner’s business. Of course, the information should again be reviewed by an experienced financier to read and interpret correctly. This is preliminary research and sometimes it is quite useful.
• A similar review of the financial condition is advisable to be done for current clients who work with large sums / incl. turnover, as a whole, and are on deferred payment. The goal is to catch on time with symptoms related to the financial stability of the client /even if it is long-standing/. It is advisable to do it at least once a year.
• Creating an internal procedure for a partner’s credit limit - works quite well, both for the sales process /i.e. do not accept an order over a certain amount, that is carefully analyzed in advance from a risk point of view/, if the client has not paid his accumulated old obligations, as well as if he decides to launch a new order at a higher value - then the difference could be in the form of an advance. The same procedure is successfully applied when buying - when needed to pay an advance to a supplier /if it is acceptable and mandatory practice/.
• Advance payment - mandatory for clients who show a systematic delay in payments, as well as by discretion - termination of work with them. For projects that require a large initial investment/materials, labor, etc./or a very long execution period - negotiation of advance payments of part of the sums, or in stages.
• Insurance of receivables - costs money, does not take all clients /for example, do not insure Sole traders and individuals, because they are not obliged to publish financial statements and there is not enough reliable information for them/, or those who have unsatisfactory results or problems with credit history or behavior, which shows that the counterparty often delays payments without a valid reason. If something is wrong in the process, it is possible for the insurer not to pay compensation, and the amount of compensation in most cases is not 100%. Often requires regular reports on work with clients who are insured.
• Factoring - this is again a financial instrument /that also costs expenses for the company /and it is necessary to be activated before the execution of deals or orders, and would have the effect of an instrument with which the activity of collecting receivables can be transferred to a third party. The instrument allows transferring the responsibility for collecting receivables to a third party, while at the same time, the beneficiary has the option to take advantage and absorb funds equal to the expected amount of receivables before the receivables itself has been collected. There are different mechanisms and options, so it is good to research in advance. Even if this type of instrument is available, sometimes the process of collecting receivables can last a long time - months, even over a year.
• Reminder policy - first, second
• Activation of forced collection through a lawyer, as a last measure.

When already, despite the above actions, there is a delay, here is what you need to do, at a minimum - an immediate reaction from your business is required, with the key being the establishment of the event immediately /and not after time/:

• Oral reminder and search for the reason / whether it is just forgetfulness, the regular excuse with accounting or there is another - lack of money /risky client/, negligence /we think whether to continue at all/, problem with the documentation process, other
• If there is no result after 2-3 working days maximum - send a written reminder politely and create a sense of urgency, initially by email, and possibly simultaneously with a letter with a return receipt.
• If there is no result or an attempt by the client to negotiate - here it is already necessary to assess the reasonableness, whether he is looking for a solution or just procrastinating/ - sending in writing with a return receipt. 
• If that does not give a result - activation of a court procedure. To activate such a procedure, additional funds are needed for a lawyer, court fees, as well as time until the collection of funds eventually / sometimes it can last for years /. And do not forget that in case of forced collection, if the client is problematic and there are other creditors, the priority is the Tax authorities, banks, etc., and only at the end the other counterparties, like you. The documentation must be in order, as well as before that there must be written evidence that the client has been sent a reminder, as well as the preliminary trade conditions and that the sale has been realized.
• As an opportunity at this stage, there is also a sale of receivables to collection companies. Of course, here too it will cost the business expenses. There are different business models, it is good to research and apply, them as a last resort.

By discretion, other additional actions can always be added, which would be justified to minimize future losses. In case you have insured your receivables or have factoring, in this whole process the institutions with which you have contracted for these instruments also get involved in the action and stimulation or assistance of the process of collecting the receivables.

Сommitment to create such a process in a company /regardless of size/ is on the management body. In particular, from a functional point of view, this is the commitment of the financial manager with whom the company works. And the execution of the steps in the procedure is a commitment of the entire team depending on the area of competence. 

Do not forget that the main goal of such a written process /which, however, is to be applied/, is to protect the company from the occurrence of similar unhealthy financial and business cases, related to the collection of receivables, as well as to establish timely risky clients and to make an informed decision whether to continue with them and how or whether to refuse an order at all.

Author: Galina Vankova, Ethical Finance GV LTD

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