Key factors for good collection management

Actualizado: 22 jun 2021

Every company or business person is constantly thinking about strategies and actions that allow them to sell more and sell better, either to new clients or to existing clients; but what is the point of selling more if you do not get invoices paid?

In today’s article we want to highlight the importance and the key factors for good collection management, so that you and your company avoid going through difficult times.

Collection problems with clients = cash flow problems

Selling is an art (as some people say) and collecting, nowadays, has become something critical to the survival of many companies, regardless of whether they are in a period of growth or well-established. Credit sales are the most widely-used system in major negotiations and require the supplier to be prepared to deliver goods or to provide services to the client, only in exchange for a promise to pay on a specified date in the future.

The key as to why sales are made under this system derives from the etymology of the word “credit,” which originates from the Latin “creditum,” meaning belief or credibility. Therefore, companies that make credit sales deliver goods/services without demanding immediate collection, though at the risk of not receiving any compensation at all.

If the scheduled collections are not made, the company must obtain money from other financial sources, because as you might imagine, costs do not disappear and the organisation has to meet its short or medium/long-term requirements. This results in a high personnel cost and competitiveness loss if these costs are transferred to sales prices.

This is one of the reasons why many businesses have low profitability. The same is true if suppliers stop getting paid; a poor image is created, as well as extra charges that complicate our commercial development.

Be aware of the debt situation of your client portfolio

For the above reasons, it is crucial that you know what type of company/person you are doing business with. This will only be possible through adequate collection management, the success of which is dependent upon 4 key factors:

1. Good advance preparation on the debtor:

  • Payment history and purchasing volume.

  • Length of the relationship with the client and their importance to your company.

  • Collection guarantees and background information on previous negotiations.

These are some of the indicators that can provide you with an idea of the client’s solvency in order to meet the scheduled payments from your client.

2. Establishing why the debtor is agreeing to pay and what benefits the debtor gains from doing so.

3. What are the costs and consequences if this is not carried out within the agreed time limit and in accordance with the agreed method.

You must be very clear about these last two points, as they will allow you to establish the persuasive arguments in your discussions with your client.

Aspects such as the image that a defaulting company projects onto the market, delays in the delivery of products/services by its suppliers, or the simple fact of constantly receiving uncomfortable calls demanding a specific amount from them are just some of the arguments.

4. Defining alternatives for settlement (payment plan) based on the previous point and proposed targets for negotiations.

Establishing more favourable credit conditions for your clients or offering them a financial incentive for the advanced payment of invoices are just some of the alternatives you can use to streamline the payment of amounts due.

Should there be a person other than the salesperson/seller that is assigned to this role?

Some argue that collection management is a core capability that the sales team must develop. However, this can give rise to a conflict of interests. The collection agent is the one who must impose limits on the client and reduce days of default.

If the salesperson is also demanding the outstanding payment, the client could say “you were pushing me to make the purchase and now you are demanding payment,” mixing sales and collection management up. Changing your contact person allows you to reduce operators' management, preventing the client from becoming accustomed to being dealt with by the same person making the sale.

Given that collection periods will continue to get worse, with average collection periods of above 120 days, along with the lack of liquidity of the banking system, monitoring collections is of the utmost importance to the liquidity of your company and therefore to its survival.

What do you think?

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