Andy continues his talk with credit control experts Rob Warlow and Adam Home and Darren Fell of Crunch about credit control and debt collection. In today’s show we ask: What should we do if it all starts to go wrong?
Podcast 26: Credit Control and Debt Collection (part 2) [ 26:42 ] Play Now | Play in Popup | Download
[00:05] Andy: Welcome to Freelance Advisor brought to you by Crunch, ridiculously easy accounting. This is episode 26, the second part of our credit control and debt collection discussion. I’m Andy White and I have with me Darren Fell, founder of Crunch.co.uk, Rob Warlow from the Business Loan Services and author of Loan sharp. Get the business finance you need, and Adam Home, operations manager at Credit Safe LTD, a family run credit recovery agency.
What should we do if it all starts to go wrong? Rob would you like to get the ball rolling?
[00:35] Rob: Yes. In most cases people wonder when do I know it’s gone wrong and it’s usually the letter from the bank where you’ve written a cheque a suddenly you realise the bank hasn’t honored it. That’s the first indication that things are not going to plan.
But clearly, if things are starting to go wrong there are some immediate steps that you can take. One of the first ones is to really just step back and take a good look at exactly where you are. I walk into many business owner’s offices and see a pile of paper on the desk and ask “What’s that?” and they say “Oh, those are my invoices”. So it starts with good management of documents and knowing exactly where you are every day or every week in regard to what is owed to you. So if you’re in that position where you’ve really lost control of your cash flow it’s taking a step back and first of all starting to priorities your list. Sit down, take each invoice, one at a time, and start listing down, the name, what the service was, when the invoice was issued, when it should have been paid and where you are today as regards, when did you last chase it and any other useful information that you think is going to help you get that payment. Then the next step is getting on the phone, picking that phone up, writing a letter or whatever, getting in front of the client to know they are now well overdue. This is another thing that business owners don’t like doing is getting a bit harsh with the client, it doesn’t matter, at the end of the day it’s your cash flow you’ve got to protect. Whilst you don’t want to be putting a good relationship at risk, it’s more important that you actually get that payment into your account. If you think “Well, this is a good client”, well at the end of the day how good can they be if they’re willing to put your business at risk. So it’s knowing where you are and prioritising the list are the two first good steps you can take.
[02:24] Darren: They clearly are not a good client if they’re doing that to you and keep stringing you on. You’re absolutely right. Many businesses are like that, they’re doing it very manually, they’re using Word templates to get their invoices out, they’ve got big piles of them, they’re not doing it properly. There are many pieces of software they can employ to get things done. They even put two or three hours a week into just getting all their expenses in, getting all the invoices out the door or email them or issue and print them then post them and then post them. Just by setting that time aside in sort of admin mode, it can make a massive difference to seeing exactly how their business is – because you’d hope that piece of software would tell you exactly your cash position. How much revenue you’ve generated, how much cash is actually in the bank.
Now if you’re doing it in the older school way of things and you simply don’t have the time to do it there’s this whole new world of virtual assistants out there or even credit controllers that can come in. They’re really not that expensive. We needed them back in the days of Pure 360, my first business, we went gun ho on selling. We were going so well and then we realised we had literally £120,000 in plus 120 days. I know exactly what it’s like where business can start running away with itself, maybe it’s going really well, maybe it’s not going so well, and you don’t do the key basics and you end up with those big piles of invoices there.
[03:52] Rob: Yes. I’m a great fan of outsourcing what you don’t know. It’s really about people starting a business because they have a particular passion. People don’t wake up on a Monday morning and say “Yeh! Today’s the day I’m going to be raising and chasing my invoices!”. So it’s the last job that gets done. If it’s not your bag, outsource it, get the software, get somebody else to do the chasing, if you’re not comfortable with it, do whatever you can to make sure everybody knows when payments are due and that you need the cash today.
[04:20] Andy: Getting your invoices out on time is a big thing, just remembering to invoice at the right time and don’t delay it.
[04:25] Adam: No absolutely. Never delay your invoice because you can only expect to be paid after you’ve issued the invoice. It’s something simple like that that can really trip up your cash flow. If you got one large client and you’re a week late in issuing the invoice the chances are they’re going to be at least a minimum of a week late in paying you. So you need to make sure you’re dotting the i’s and crossing the tees. If you’re not comfortable with chasing your own invoices, if your partner has an hour or two free every week it’s something that they could potentially do on your behalf and that gives the distance – a lot of freelancers are going to be working very closely with the end client. They may be working in their premises and they may be working cheek to jowl with them on a daily basis. If you’re not happy to phone up somebody that you’re in a position like that with and who you’re going to be meeting again next week, if you can get somebody with a bit more distance to give them a call and a nudge and find out when the invoice is going to be paid, that can make your life considerably easier. Similarly if you know another freelancer that you trust, there’s no reason to stop the two of you swapping your aged debtors and getting together once a week in one of your houses or in your offices…
Andy: I like that idea. A sort of a credit control buddy.
Adam: Yes. Essentially.
[05:45] Darren: Adam, just for the people who’ve just set out in business, just can you quickly clarify that aged debtors thing so they get it.
[05:54] Adam: It’s just any body that you owe money to who are past your terms. So if you’ve got five accounts that are past your 30 days they are aged debtors. Anybody who’s still inside your payment terms or who’s paying on time. It’s those people who are outside of it so you want to be hitting the oldest people first – people who are the most overdue.
[06:15] Darren: I made the mistake of flying out with a number which some people in the audience wouldn’t have understood anyway, like 120 day plus people. They’re aged debtors. So you’ve got to catch them within 30 days, worst case get the money in by the 45th day point. Just on that point of getting invoices out on time, that can make a massive difference. Just from my perspective when Iwork with a freelancer in another business and I’ve spoken to them and we’ve specced it out and in the same day I come back to my to my email box, it’s say 5 o’clock after I’ve met them earlier in the day, and I’ve have an invoice for the first part waiting for me from them – I can only say, I’m impressed. It’s not “Oh how dare they get those straight in”, I’m impressed that they are that on the ball. In out new build of Crunch.co.uk, we got in this great freelancer, we saw him, we specced it out, he understood it, and there was an invoice waiting for me in my inbox by the end of that day – impressed!
[07:14] Adam: Being proactive in your credit control will not hurt your professional standing amongst your peers or your clients. In fact presenting a professional face to handling your own accounts and your own cash flow is only going to reinforce the respect that your clients have for you. Not only are you good at the job that they’ve hired you for, but you’ve got enough business acumen to understand that cash flow is the very life blood of your business, and that you’re taking a proactive approach to making sure that that flow will always be there.
[07:46] Rob: I couldn’t agree more. It really sets the tone for how you’re going to deal with that client going forward. It really sends a clear message – I do things in a structured way, I do things professionally. It really gets your contracts off on a very firm footing.
[08:02] Andy: So what would the debt collection process be then Adam?
[08:05] Adam: Well initially assuming that you’ve got out the invoices et cetera to the client, you need to get on the phone – that’s absolutely imperative. A lot of people will suggest writing letters, however letters can be ignored, can be misfiled in the bin. If you get on the phone to your client, or your last client, you’re a lot harder to ignore. So, first things first, if they’re overdue, whoever is the most overdue – get on the phone and find out where your money is.
The second thing to do is to take notes. Even if it’s as low-fl as writing down what they say to you on the invoice you’re chasing itself, and keeping that somewhere safe. If they say, “Yes, I’ll definitely send you the cheque on Friday”, if you haven’t made notes, how are you going to know if they have definitely sent you the cheque on Friday? You’re probably not going to remember everything. So make notes however you wish, on your phone, in an email, in a spreadsheet, whatever you prefer. But keep a record of what they’re saying to you.
If it’s urgent, then make it clear to your client that there will be no second chances. By this point they will already be overdue – probably significantly overdue. If you’re on the phone to them and they’re promising you payment, make sure that they’re aware that if that payment is not received, that you will be upping the ante and placing it for collection with somebody else. You don’t necessarily have to tell them who at this point, but they do need to be aware that they get one chance to deal with you, and then they’ll be dealing with somebody else. Especially if it’s a case that you’re own cash flow is suffering as a result, just make sure that they’re aware that you’re playing hardball now, you’re not going to be messed around any more. Going back to what we said previously as well, never tell your clients or your past clients that you need the money. If you’re in particularly dire financial straights, do not tell the client that you desperately need this money to pay your rent, or your rates or your water or anything of that nature, because there are a significant minority of business owners who if they know you’re in financial trouble, will literally just sit on your cash for as long as humanly possible in the hope that you actually just go bust, and they either get to keep the money or merely only pay a small amount of it to the receivers or the liquidators.
[10:23] Darren: That’s pretty harsh tactics isn’t it but it’s got to be employed because maybe they’re suffering equally so I think in essence just don’t tell them the truth. You maintain a strong line that your business is going fine, you need to collect it, you gone past the terms. Don’t say, “Look I need to pay my VAT bill” or “The corporation tax is due and I need the money”.
[10:50] Adam: Yes, absolutely not. Just say, “This needs paying because it’s overdue”. Don’t go into any more detail than that, even if you’re reduced to living in your car and making a call on your mobile phone. Please don’t tell the client that because there are unscrupulous individuals who will take advantage of freelancers simply because they can. You don’t want to be one of those people.
[11:12] Darren: OK. Just so I get this straight, and for the audience who may be feeling a little bit passionate, shall we say, about the scenario about being owed this money. It’s about holding a professional tone isn’t it. For God’s sake don’t do letters because it’s going to go in the bin, don’t do emails it’s not going to worth while, get on the phone and hold a professional tone, you don’t want to be swearing down the phone at them. What’s your thoughts, Adam, should you turn up at the office or is that just a no-no?
[11:44] Adam: It’s going to depend from freelancer to freelancer and client to client, there is no magic bullet. We don’t do personal visits here but when you deal with corporate debts it’s often far harder than it is with personal debts because you’ll have, potentially, reams of invoices, contracts that are 5 – 10 pages long. It’s simply not practical to turn up on somebody’s doorstep if you need to refer to documentation like that. We would always recommend that you just call. It’s personal enough but without the possibility of it becoming intimidating for either the client or the freelancer. If you’re a freelancer and you fall out with your client, you may very well find yourself physically thrown out of their premises and obviously any type of physical altercation like that is not going to help you get paid, which is what you want at the end of the day. If you’re uncomfortable in calling people that you’ve potentially been working very closely with, just ask your partner or your mum, or your nana, if she’s competent enough, to just spend an hour or two a week just touching base with your clients. If you’re calling before the invoice is due it gives you an opportunity to find out if there’s any issue with the invoice prior to when you’re actually expecting the money to hit your company. As for when it’s overdue, Sid, our MD here has a line he likes to use and its, “Persistence overcomes resistance”. Nine out of ten times if you’re on the phone every couple of days saying “My cheques still not here, can you make a bank transfer”, as Rob said before, he who shouts loudest gets paid first.
[13:20] Darren: OK. So there’s the preamble to the process. They’ve gone past the line, Adam, you’re handing it over to a specialist agency. You’ve told them that, you don’t need to tell them exactly who it is, you don’t need to say it’s Credit Safe in this example. What’s the next steps? What steps do you go through?
[13:35] Adam: The first thing is never ever pay a collections agency any money up front at all. If they’re as good as they claim to be, they would only want paying after you’d successfully received your funds. There are a number of agencies out there that purport to offer “no collection no commission” debt recovery, but they will charge you a £230 – £250 file placement fee, or they call it a joining fee, or a registration fee. But that’s essentially to cover them if/when they don’t collect your money. I spoke to a freelancer the other week who was in PR. I had a very long chat with her, I spoke to her a couple of times during the course of the day, and later on she came back and said that she’d decided to go with another agency. She said that she’d paid said other agency £229 plus VAT merely to begin acting on her behalf for a £2,000 debt that she had outstanding. The debtor at the end had offered £300, so after paying the fee to the collection agents and then paying their commission on top, she would have been left with about £45 in total for her pocket out of a £2,000 bill…
[14:48] Darren: What!? That is unreal. Adam is there any way – you now got me a little bit concerned and I’m sure the audience is a bit concerned as well on a debt collection agency, I can imagine there’re some cowboys out there – how do the freelancers and the small businesses search for a reputable debt collection agency that they can trust that won’t rip them off?
[15:11] Adam: Ideally if you’re going to choose a reputable collections agency you need a recommendation. Whether that comes from another freelancer, from your accountant or from a member of a professional body that you my be part of. A lot of them will have services that they recommend to their users. Phone them up and find out if debt recovery is a service that they are able to offer their members. If not, find out if they can personally recommend a reputable agency to you. Same with your accountant and other freelancers, they may have had the same issues and they may be able to point you in the right direction. But please, please, please, don’t pay any collections agency any money up front for the simple reason that they’re as good as they’re trying to tell you they are in the sales call, they wouldn’t need the money up front – it’s as simple as that.
[15:57] Darren: OK. Well I can concur as a chartered accountancy firm, Crunch has been looking for a really good debt collection agency for freelancers and small businesses for some time and I can tell you Adam, it’s not been an easy job at all. It really hasn’t been. I’ve been so unimpressed with conversations and meetings and haven’t felt an inherent trust. I think that’s a classic thing to watch out for if there’s any advanced payment it’s not good. The other thing that Credit Safe came with in terms of me picking them as a debt collection agency for our clients is a Professional Contractors Group accreditation, they are the ones approved by the PCG which is saying a hell of a lot. So get advice, get recommendations or overall look for an association recommendation like the PCG.
[16:45] Adam: Absolutely.
[16:46] Andy: Excellent. Exercising your right to add late payment and interest is an interesting one, I know certainly in my case there’s a sort of reluctance to do that, is there a sort of mind set you should adopt?
[16:59] Adam: Well, in my experience it’s a very useful stick to go along with the carrot of the service that you’ve provided in getting your clients to pay you. If you’re quite clear up front that you won’t tolerate late payment and that you will add your statutory late payment costs and interest, you can always use that when you’re chasing your overdue accounts. So they say, “Yes. We’re definitely going to pay it on Friday”, “OK. Are you sure you’re going to pay it on Friday because otherwise I will be adding late payment costs and interest”. The late payment costs and interest are statutory so you don’t need to include it in your terms and conditions because you’re always protected by that piece of legislation…
[17:40] Andy: Ah. That’s interesting.
[17:41] Adam: So can leave it out of your terms and conditions; you don’t need to include anything about late payment. Some freelancers can be wary of that because they think it gives the wrong impression to the client. So you can just completely leave it all out and you can still add the late payment costs and interest in line with the legislation at any point after the invoice is due. If you do add it, if they then turn round and pay immediately, be prepared to potentially waive any extra costs that you may have added to the account because if you add the late payment cost and interest and they pay in three days, do you really want to continue chasing your client for potentially £100 if you’ve just received, say, £5,000? It’s a useful stick to go along with the carrot.
[18:25] Darren: Adam, I don’t think I’ve had to use that. It’s about, in sales I call them touch points, always having an excuse to keep in contact with that customer, “How’s it going? We’ve got three quarters of the way through the build on this side, we’ve done all the user interface side”. Just keep reminding them that you’re there and the invoice is there. Try and keep the relationship on absolute tip top order, and the communication is regular. So to date, and really luckily I think now hearing this, I have never had to use that legislation.
[18:59] Adam: Well it’s one of those things if you can tie it in if you get somebody else to d your credit control on your behalf, if you’re working cheek to jowl with the end client but somebody else is actually chasing the invoices, you as the freelancer can hold your hands up and say “Oh see, I’m really good at what I do but I wouldn’t mess with the good lady that does my accounts…”
[19:21] Darren: She’s hardcore…
[19:23] Adam: “She’s hardcore. Blame her,” say “You know, she’s absolutely on the ball with late payment, so I’d suggest you get that paid fairly shortly and I’ll see if I can get her take it off”.
[19:31] Andy: I know what you mean. I made my self a sort of Heath Robinson robot that sent out email at certain time and that would send an email to people who owed invoice and they were late in paying and at the top of each email it would say in block letters, THIS IS AN AUTOMATICALLY GENERATED EMAIL. And then they’d phone me up and go, “Oh. I already paid that three weeks ago”, because sometimes it would go wrong, and I would say “Oh, I’ll have a word with credit control robot”, so I could blame a third party.
[19:57] Darren: Very good. I think it’s always useful in life to be able to, not pass blame or scape goat, but to have somebody else doing the other task. Yes I’ve always used credit control as the businesses have got to that point and get them doing it. But there’s two ways isn’t there Adam. There’s maintaining a fantastic relationship so the customer has no other way but to pay you precisely on time than muck you about because you’ve done a blindingly good job and you’ve delivered precisely on time. But yes, if things really don’t work out then, I like it, use an alternative person who’s experienced in that area and who can apply the necessary hard words.
[20:41] Adam: The problem that we see here when freelancers come to us and they’ve got large payments that are outstanding, is that they will have been working with someone very closely. They will have grown to almost treat them as a friend when in reality they should never loose sight of the fact that it is strictly a business agreement. And the terms may be 30 days and they could find one invoice is 60 days overdue, the next one is now due. The client will say, “Oh, I’ve got this reason, that reason, my dog’s been run over, my auntie is in hospital. I’ll pay you X now”, which is never more than roughly 10% of what they’re owed, “…give me two weeks, and then I’ll pay you the rest of these invoices that are outstanding”. So the freelancer thinks “Right, OK, so I’ve got X amount, so Y amount will follow shortly”. Two weeks later there’ll be another excuse and then they’ll find out that they’re three invoices down, and that their oldest invoice for 3 months ago has had maybe 10%, 20% paid off, and that’s how easily you can get into a hole with your client if you haven’t got somebody saying to you, or if you’re got hard enough to say to yourself, “I have to cut this client off at X point”.
[21:52] Rob: It’s got to be down at the end of the day that old adage of “He who shouts loudest”…
[21:58] Darren: I mean it’s always useful if you can stop delivering something. If it gets to a point that you’ve got a line in the sand and you can say, “Look. If you haven’t delivered the money on that point I’m going to have to suspend the service”. With software systems online it’s very easy if someone doesn’t deliver payment for a defined period then you can temporarily suspend it, allow access to the whole account, allow them to do a lot of things but allow them not to do other key things. There’s an advantage there. There’s a disadvantage of course for a consultant offering a whole strategy, completely helping a company turn itself around, delivering all of that really detailed and useful knowledge and then they’ve got nothing to leverage have they, really, other than what you were talking about in terms of interest payments and this legislation.
[22:48] Adam: Well yes, if your just delivering your knowhow, potentially if your delivering that to struggling business anyway, the chances are you will want your client to succeed. So if they come to you and say, “Look, I’m a little short this month. Can I pay you 25% and then I’ll pay you the remaining 75% in two weeks, the chances are you’ll look at your client and think “Well, I really want him to succeed. I’ve invested my time thus far in them, and the chances are you will probably let them carry on. So you’ll get 25% of your invoice, and you’ll work for another thirty days, and then you may find that, again, they’re paying you in dribs and drabs. So you have to have a very definite cutoff. We speak to freelancers all the time that have reached a very definite cutoff, an that cut off is that they can’t pay their mortgage this month…
[23:35] Darren: Oh God. That’s serious stuff.
[23:37] Adam: That’s serious stuff. That’s is far too late to actually be acting. If you get to the point where you can’t pay your mortgage, you probably went past the cutoff point 2 or 3 months ago…
[23:48] Rob: Clearly document all of these sub-agreements as well, so that both sides are both very clear as to what they’re entering into going forward. So it does them make that cutoff period that much easier because it is very clearly in writing , this is what we’ve agreed, I can’t continue any more.
[24:06] Adam: Absolutely.
[24:07] Darren: Yes. Exactly. So I think we’re running out of time for part two and again it;s probably blown the minds of the audience in terms of the thinking, “All these things I have to think about”. Don’t worry, we’re going to get the notes written up, transcribing all of this so you go back and look. You can obviously listen to this again and again, and Adam’s kindly written for Credit Safe, for the business for all of the customers they’ve got, a fantastic guide that we’re going to transpose into a Freelance Advisor guide and put it in our brand livery obviously with all the credits going back to Adam and Credit Safe which should prove to be invaluable. There’re some points that you made in there Adam on the interest to be charged and that legislation that I know is there but I personally as a business man have never had to use it so I’m unaware, so that’s when I hope that guide will be really useful for me and for the audience.
[24:56] Adam: Well the guide’s more for your average freelancer that knows exactly what they’re doing in their chosen field but may have little or no knowledge of credit control. So it should provide a useful guide for everything for setting up the account and making sure that you know you’re dealing with at all times. And always remember rule one: a sale is not a sale until the money is in the bank.
[25:18] Andy: Well we’ll have to leave it there. Yet another great discussion. Thanks for listening to Freelance Advisor so it’s goodbye from me, Andy White, it’s goodbye from Darren Fell.
Darren: Goodbye, Andy and thanks very much guys.
Andy: And it’s goodbye from Rob Warlow.
Rob: Yes. Goodbye. Thanks very much.
Andy: And Adam Home.
Adam: Goodbye, thank you.
Andy: We wish you all the best and we’ll see you next time.
