Changes in Payment Patterns: Customer payment patterns are consistently different from the agreed upon terms of sale. When established payment patterns start to deteriorate, you have to assume that cash flow problems may be the cause and you should investigate quickly. If you determine this is the case, you will need to take steps to ensure no additional credit is extended in order to minimize your financial exposure. If the customer is trying to work with you then the customer is showing signs to honor their financial obligation. You may still have to monitor the account closely. If your customer is avoiding you then it is time to escalate collection efforts to protect the receivable.
Cash Flow Excuses: Good customers and not-so good customers have the occasional cash flow issues. When a customer claims they are experiencing cash flow problems, a saying comes to mind “trust but verify”, you need to independently verify what you are being told and establish a deadline for a resolution to the cash flow challenge. If the customer fails to meet the deadline date, you must recognize this as another broken promise. When a customer is constantly waving the cash flow flag, your receivable may possibly be in jeopardy. Reach out to other vendors to determine if they are experiencing the same payment delays, you should also order an updated credit report for additional support. Try to minimize your financial exposure by not extending additional credit. Attempts should be made to bring the account current within two or three weeks and in the interim sell only on COD terms until you are assured that the customer is back on track. Watching for the early warning signs of a customer in financial distress gives you the opportunity to take the initiative before it is too late. When warning signs appear, don’t delay especially in the signs begin to increase. Take quick steps to protect your receivables by contacting your customers on a regular basis, investigate problems as soon as they arise, and determine a plan for resolution. Remember the phrase “Customers make promises and keep them; debtors make promises and break them.”
You know you are dealing with a potential problem account if you are routinely leaving more than two messages before getting a return call or if more than two calls are not returned. We recommend following up on the messages with an email, copy yourself on the email and tag a future follow up date. This simple action should increase your response rate considerably. Save yourself time by having written standard verbiage and incorporating this step into your “collecting techniques package.” Better to be proactive vs. being reactive.
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Early Warning Signs to Watch for
Acting quickly on accounts which show signs of delinquency have several advantages. Firstly, it allows you to consider proactive steps to prevent a customer from becoming a debtor. Secondly, you can accelerate collection efforts before it is too late. Acting early might allow you to prevent unnecessary shipments to a past due customer. Finally, by being proactive you have the ability to resolve the concern to your satisfaction or possibly terminate the credit relationship if necessary.
What are some early warning signs? Changes in Customer Buying Patterns: When a customer’s buying pattern changes, your customer may be seeking credit from other vendors wthin your industry. This may be especially true if the customer’s payment patterns have also changed. A company under financial distress may frequently look for credit elsewhere to stay afloat. When a customer’s credit limit with you and other suppliers is at its maximum, the customer is going further in debt by obtaining credit elsewhere.
You may want to order a credit report from CrediFacts to help confirm this situation.