When you keep your side of the bargain with a customer, it is only fair that they should keep theirs by paying you... and paying you on time. Sadly, as everyone in business knows, this doesn’t always happen.

How big is the problem?

The bad debt calculator below shows you how many extra sales you will have to make in order to recoup the profit you lose on a single bad debt. For example, if your profit margin is 10%, and a £5000 invoice is not paid, then you will have to make another £50,000 worth of good sales to make up the profit lost on the one bad sale. Shocking, isn’t it?

Why does it happen?

In their 1999 survey, business finance specialists Alex Lawrie asked UK companies why they paid invoices late. The top ten reasons given by credit controllers were as follows:

23% Waiting for the cheques to be signed
22% Invoice lost
16% Cashflow problems
15% Person dealing with it is unavailable or off sick
6% Cheque is in the post
5% Waiting for the cheque run or for a new cheque book
3% The invoice is being disputed
2% We pay on 60/90 days – not 30 days
2% Missed the payment run

On a lighter not, some of the more bizarre reasons given by credit controllers when refusing to pay included:

• “The owner has been buried with his cheque book”

• “All names are put in a hat. If yours is drawn out you get paid. If not it stays in the hat for next month”

• “I do not speak English”

• “We’re in the middle of an armed robbery”

• “Not now, its the office party”

What can you do about it? Some unusual ideas that really work....

• Prize draw – One business supplier in the North East holds a monthly prize draw. Every customer who has paid their account on time goes into the hat, and once a month a winner is drawn out and treated to a meal for two at the best restaurant in town. The scheme costs about £1200 a year to run. And not only does it greatly improve cashflow, but it also creates a talking point and makes customers smile.
  
  

• Big prompt payment discounts – Most prompt payment discounts don’t work because the 1%-5% discount traditionally offered is not enough to galvanise customers into action. So a Leeds based business we have heard of gives its customers a massive 33% settlement discount. But just look at how it does it.... it’s main product has a list price of £3000, which it is usually prepared to discount down to £2000. But rather than make that £1000 reduction a "sales discount", it makes it a “prompt payment discount”. 
  
  In other words, the invoice shows  the price as £3000, but also contains a line that deducts the £1000 and reads: “This £1000 prompt payment discount may only be deducted if payment is received at our office no later than...” followed by a date exactly 7 days from the invoice date. As a result the vast majority of customers pay within 7 days. Why not turn your sales discounts into BIG prompt payment discounts in this way?
  
  

• Increase you prices – Another business wrote to all its customers telling them that that it was increasing all of its prices by one ninth (ie 11.11%). But in the same letter it also explained that customers paying within 14 days of the invoice date would be able to deduct 10% from the invoice value. Nobody complained, and most of its customers now pay within 14 days. What’s more, and here’s the amazing part, customers now actually come in to say “thank you” for being allowed to pay less by paying early!
  
  Of course, when you look at the maths you see how clever this particular strategy is. Initially a £100 item goes up to £111.11. So those who pay after 14 days pay the full £111.11. While those who pay within 14 days pay £111.11 less the £11.11 prompt payment discount – which comes back to the £100 they used to pay before the price rise. So either the business gets paid more or it gets paid more quickly – and either way its owners are happy!
  
  

• Prompt payment benefits – Discounts are not the only way you can motivate and reward customers for paying you promptly. There are many other benefits that you could reserve only for those who pay on time. For example, you could give them priority when booking service and repair visits, free upgrades to express delivery, or even free delivery, lower minimum order quantities, extra technical support, free helpline, special offers on upgrades, discounts on their next purchase, access to a special section of your website, extended warranty terms, membership of a user group, advance notice of new products or whatever else is most relevant in your case. The key is to make these benefits exclusive to customers who pay on time, because that way many more of your customers will pay on time.
  
  

• Payment upfront – Another powerful approach is to insist on payment upfront. A useful way of explaining this is to say: “In order to ensure that we have sufficient resources available to continually improve the level of service you receive, our policy is not to ask our good clients to subsidise the handful of clients who abuse credit terms by not paying promptly (and, in some cases, not paying at all!). As a result our standard terms are that payment is due when we start the work.”
  
  

• Offer finance – Some retailers (car dealers and white goods retailers in particular) offer to arrange finance for their customers. But most others don’t. And that is all the more strange considering that finance allows the business owner to make more sales (because more people will be able to afford to buy), get paid quickly, and perhaps even share in the profits made by the finance company. There are now many specialist finance companies offering many different types of finance options. For example many professionals now offer their clients the opportunity to pay in instalments by signing a simple agreement with a finance company – and because it is what is know as “recourse financing”, there are no processing delays, very low rates of interest, and the finance company guarantees never to turn down an application. Why not explore whether you can arrange something similar for your customers?
  
  

• Using humour – Humour is a great way to defuse difficult situations – including asking to be paid. Some businesses use funny cartoon postcards and faxes to chase debtors. Other use amusing letters. For example, the text given below (which works best as an e-mail, but can also be used as a letter) gets extremely good reactions and results.