Effective debtors’ management - key of sustainable and profitable growth..

Effective debtors’ management - key of sustainable and profitable growth:

Your sales are not completed unless you collect full sales consideration. We talk this sentence lot of time at different forums and this statement is very much true. At the end of the day money matters for sustainable growth of any company. You need funds to buy raw material, pay salaries, pay taxes, pay for utilities which are must for smooth running the business operations. We see lot of news about companies filing application of bankruptcy specially when they are not able to pay the dues to their bankers due to product not in demand in market or their customers are not paying them in time. This creates lots of pressure on cash flow. Hence it is necessary to have effective debtor’s management.

Now let me give few examples about how companies can effectively manage their debtors.

Implementation of credit control policy:

Credit control policy is a written guiding document for the company which explains how to deal with customer outstanding receivables. The policy may have the detailed procedure for handling the new customer as well as existing customer. In policy document you can actually define whether to deal in advance payment with new customer or offer minimum days credit period. You can also set the credit limit in absolute value i.e. for new customer looking at his first expected order. The order value can be credit limit for customer. For existing customer you can set credit limit based on historic trend of customer payment behavior. Once you set up this process, all future transaction goes as per set limits. The policy can also define the approving authority for all exceptional cases where customer has outstanding but based on commitment from customer, Manager can approve the additional business. With this controls company can limit the risk of delay in collecting payments from customer.

Customer credit worthiness evaluation:

For all new customers, company should evaluate the credit worthiness of new customers to safeguard any risk associated with customer for non-payment. For all listed companies on stock exchange, you can get their financials online. For all other companies you can check the government websites like ROC etc. which gives the financial details of companies. The other way you can also opt is to enquire in market with your references about new customers. After all your evaluation, document entire evaluation. Discuss with business unit and finance head of your company and decide whether you need to offer credit to new customer or you should work in advance payment term only.

Business unit responsibility:

It is prime responsibility of business unit to ensure that whatever is sold to customer, the sales consideration has to be collected. The involvement of business unit team for overdue collection helps company to maintain the customer in long run. Your companies contact for your customer is business unit team who interact for business hence it is easy to get the outstanding collected from customer.

Setting up credit collection team in-house:

It is very essential for any company who is midsize level setup to have dedicated credit collection team. The reporting structure for this credit control team should be either to commercial department or to finance department so that they have independence to perform the task. Credit collection team should be an intermediary between customer and business unit. This team should primary focus on all outstanding >60 days or number of days company may feel. The reason being on this focused outstanding is normally majority of customer will pay you as per credit period agreed. So as such no extra efforts required. Moreover business unit anyway follow up with customer if they have not paid as per standard credit period set for customer. What is left out is the outstanding which customer is not paying and utilizing the credit period double then what is allowed for them.

The commercial head, or finance head along with business unit head should have regular meeting with credit collection team to have all updated status for all customer. During this discussion all participants should discuss what are the main issues being faced for non-collection of such outstanding. This support from your credit collection team will definitely boost your collection and will improve the cash flow situation.

Your outstanding receivable and Profit and Loss account:

As per accounting standard, if company is not in position to collect the money from their customer, they have to make bad debt expense provision in your company’s profit and loss account which reduces the profitability for the company. So what does it mean? It means your non collection of dues in time reduced the company’s overall profitability by booking additional expenses provisions and moreover you are also not in position to claim income tax setoff. You got hit from both the end. Hence better we collect the outstanding well in time.

Automation of outstanding collection information:

Information flow at all required level is important so that every interested party in the company is aware of the customer outstanding. Normally the companies are generating age wise outstanding report by customer code at the beginning of the month and such reports are being sent to business unit and collection department. Then whole month you are dependent on this first week report. Instead if your company is using business unit IT tool which helps them for planning and executing the sales on daily basis, implement credit control factor in such IT tool where as and when they select the customer name or code for sales planning, the outstanding invoices will first reflect on screen. This will help business unit to take immediate decision whether to deliver further services or whether to collect the payment first.

You can also implement the blocking system for regular defaulter customer wherein you can implement approval process for any next sales planning. The joint approval system can help company to understand and take appropriate decision for business. It may be surprise to you that after you blocked the customer account, your customer will release your long outstanding payments.

You can also implement the customer payment behavior in your CRM system from where you generate the proposal for any new business. The customers payment behavior analysis will help you in costing wherein you can actually add finance cost so as to take care of extended credit period utilized by customer.

If possible make invoicing automation too wherein at the end of invoicing page, system will generate the list of previous outstanding page which can be treated as annexure page to main invoice.

Dunning letter, Balance confirmation letter:

It is very important that we keep on sending outstanding invoice details to all customers and keep the dispatch document and acknowledgement documented. Such regular reminder also helps customers to keep their accounting record up to date. You will be surprised to get calls or emails from customer asking for missing invoices which are not received by them. You will have to incur the courier cost for such regular communication with customer but believe me, it will pay in future. Most important sending regular balance confirmation letter is also requirement during your statutory audit.

Dispute resolution:

Your customer may not be paying you because of certain open issues from your end or there may be account reconciliation issues not resolved or customer may not be happy with your goods or services. Go, meet, discuss with customer and ensure you are satisfying your customer’s requirement within the contractual boundaries. Never disrespect your customer; it may cause crises in business. Once all issues are sorted out, I am sure customer will pay your dues.

Legal actions:

After all your efforts, still your customer is not paying? You are left with no other option but to take legal action on your customer. Before sending direct legal notice to your customer, ensure you have below documents in place.

• Signed contract with customer with clear payment terms and contract value

• Goods or service deliver documents with customer receipt acknowledgement

• Customer communication by way of reminder letters, dunning letters, balance confirmation letters along with courier acknowledgement.

• All email communication which is sent to customer.

• Responses from customer accepting the liability or communication of commitment to make the payment.

Once you have all above docs, draft the letter to customer addressing all the directors, owners, of the company, finance head and person at customer with you are coordinating intimating if payment is not released within stipulated time frame, we may go for legal action against company. Send such letters only through registered A.D post. Attach all above documents with your letter.

Wait for few days. Still if customer has not paid the due amount, hire lawyer and handover the case for filing in the law of court.

Now there are two ways of filing the case:

One is “winding up petition” wherein you request law of court to initiate the legal procedure for recovery of overdue outstanding along with interest and all legal fees. This process will take bit time.

Second one is “Summary Suit” which is faster way of getting your legal case registered in laws of court.

You will have to have patience till your case is disposed-off in court which may take few months or years as well. If few cases you may experience that after court has sent the “summons” letter to your customer, customer may pay you entire outstanding and may request for withdrawal the case.

Please try to avoid legal route as far as possible. Bringing the customer in your company’s portfolio is not easy. But losing by way of legal case will not take much time. Have good repo with your client and maintain the long term relationship,


Please remember your company and yours Clients Company are established to grab business not to make money. Not paying your dues is not the prime intention of any company. Every company has goal to increase their sales and profitability and they need goods or services for which they will pay. Hence understand the customer requirement, deliver excellent level of goods and services, have good relation with your customer and collect your money in time. Remember “customers are the assets of business” at the end of day.

About The Author

Arun JaiswalChief Financial Officer
TUV India Pvt Ltd