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Cashflow is the lifeblood of every organisation whatever its size or business. Failure to ensure an adequate supply of funds through an organisation will inevitably cause it to wither and die, regardless of product innovation, product efficiency, market demands or sales and marketing effort.

Bad cashflow can cause profit erosion. Each company has its own debtors and creditors.  Failure to collect from debtors speedily and efficiently means that finance from elsewhere must be obtained in order to satisfy outstanding creditors.  Today we have relatively low interest rates but not much money available for lending so finding this finance can be difficult.

During a recession many companies will be trying to keep hold of the money they have for as long as possible, and you hear stories of companies only releasing the payment after being asked for it. This means that we need to spend more time collecting debts in order to keep our cashflow healthy.  Also during a recession it is very important to collect, as companies who are not healthy financially can close down leaving you with an unpaid debt.

Many companies are worried about collecting debts as they believe that may sour the relationship they have with their client. For the communication to be effective it must be, personal and two-way, which makes the phone the ideal medium. It will not sour the relationship if done correctly, and sometimes will even strengthen it, as when having a discussion with the debtor you may well find out they are also owed money, and you are showing them what they need to do.

It is well known that the longer it takes to collect a debt, the more money value depreciates.  It’s also been proven that the longer the collection effort drags on the less likely it is that the account will be collected successfully, and the more it will cost to collect.

The statistics on collecting from the American Debtor are as follows – I don’t know if this survey has been carried out in NZ.

• 87% will pay on the first request
• 10% will stall, often have a grievance.  Will not pay, but can be forced
• 3% deadbeat,s or to use a better term, credit criminals.
   

TIME and THE VALUE OF MONEY
The longer it takes to collect a debt, the more the value of money depreciates.                                    

$1 Current >90c 2 months >67c 6 months >45c 1 year >23c 2 years >15c 3 years >1c 5 years.

It’s also been proven that the longer the collection effort drags on, the less likely it is that the account will be collected successfully, and the more it costs to collect.
 
So what is the solution?  There are several things I suggest we start to do immediately. 

1. Start collecting early in the cycle.  When the money is due on 20th of the month, it is overdue by the 23rd or 24th and at that time it is a very polite simple call to the debtor to ask for payment.  Words like “we haven’t received the payment, is there any reason for this” work very well at this time.