Chasing overdue accounts is a task that most SMEs dread and often put off but getting the accounts in the door is an absolute necessity for effective cash flow management. Also, if you have provided a product or service to a customer they are obligated to pay for the item they have received - always remember that you deserve to be paid on time and in full!
The first step in chasing overdue accounts doesn't have to be the dreaded phone call, collection letters are an appropriate and effective means of requesting payment. The trick is to get the tone right and that should be determined by how far overdue the debt is. For an account that's just past due, the letter is simply a friendly reminder the bill remains outstanding however, if the bill is significantly overdue, a more serious tone should be used.
So here are a few do's and don'ts to help you get started.
Early collection letters
Chasing overdue accounts is always a fine balance between getting the cash you are owed and maintaining a friendly relationship with your client. Therefore, an early collection letter needs to be a polite and friendly reminder to your client that their bill is overdue.
The following is a guide on the do's and don't for an early collection letter:
- DO: explain the situation briefly. This should include information such as the total amount due, the date of the purchase or service and any invoice or product numbers
- DO: use language that is polite but firm
- DO: write clearly and concisely
- DO: make the point that payment is required now before further action is taken (politely)
- DON'T: make threats
- DON'T: make your letter longer than one page
Later collection letters
If your first letter is ignored and payment is not received, it's time to take a tougher approach to getting your cash. This doesn't mean its time to make threats, particularly if you don't plan to follow them through, as your customer may call your bluff and you'll be left with nowhere to go next time they pay a bill late.
So, the do's and don'ts for a later collection letter are:
- DO: keep the same professional tone as you used in your early collections letter
- DO: note your previous attempt to collect the overdue money
- DO: include a firm deadline for when the payment must be received
- DO: outline the implications of not paying. For example, if you plan to hand the account to a collections agency or suspend the customer's service your letter should state this
- DON'T: make threats you don't plan to follow through on or you may find your customer calls your bluff and you are left without payment
It doesn't matter whether the account is one day overdue or fifty, writing a collections letter can be difficult. It's important to sound firm but ultimately you do want to keep the customer so getting the tone right is absolutely critical. If you are uncertain about your collections letters or want to keep yourself one step removed from the accounts receivable process as a means of managing your client relationships, the best approach may be to call in the experts.