Previously we looked at how big a problem bad debts could be for a business (check out the bad debt calculator to see how many sales you need to make good the profit on one bad debt). But what can you do avoid your business having bad debts?
A lot of things you need to do are really obvious:
- Credit check new customers before extending them credit
- Have a credit control function. Even a one man band can chase up unpaid invoices!
- Don’t sell more goods or services to someone who already has overdue debts. You’re risking throwing good money after bad.
Here are a few more ideas for things you could try:
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.
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.”