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Overdue Account Prevention Measures

Simple Alliance, Kenya Limited

Defaulting Debtors

As a business person, you are highly likely to face the hurdle of dealing with delinquent accounts. Some of your credit customers may fail to honour their repayment promises. Defaulting debtors pose a risk to your business by disrupting cash flow. You need to institute precautionary measures to prevent debtor accounts from becoming delinquent.  Some viable options include:

  • Accepting key credit and charge cards
  • Not extending credit

Avoid Credit Transactions

Although certain businesses can be operated without credit provisions, completely avoiding credit transactions could be a tall order. When dealing with new clients without credit histories, you could:

  • Emphasise Cash on Delivery (CoD) terms
  • Ask for deposit
  • Ask for certified money orders or checks  
  • Putting payment terms in place
  • Reviewing your customer’s credit details
  • Setting up an overdue account or billing system 
  • Recording all transaction aspects 

 Accept Main Charge or Credit Cards

Your acceptance of credit and charge card payments will introduce convenience to your customers.  The major benefit you reap from this provision is receiving your cash in a short while.  Credit card payments however have certain demerits, namely:

  • Failure to correctly follow regulations puts you at risk of being liable for fraudulent charges
  • In case of payment disagreements, your customer can withhold payment 

Institute Payment Terms

Clearly state your chosen payment terms on your invoices and contracts. This initiative publicises the terms to customers. The terms define important transaction elements such as: 

  • Your anticipated payment method
  • Overdue accounts’ penalty rates (set interest on overdue accounts)
  • Early payment discount rates   

Review Client’s Credit History

Before extending credit, consult credit reference bureaus for prospective client’s credit history.  You could as well ask the customer to fill out a New Customer Form. You could have separate forms for business and consumer clients.   

Business Client

The New Customer Form details that your business client could put in include:

  • Business name
  • Phone number
  • Address
  • Tax number
  • Name(s) of principals or owners  
  • Not less than three references

Consumer Client

In the New Customer Form form, ask your potential consumer client to fill in details such as:

  • Telephone number
  • Address
  • Whether home is rented or owned
  • The duration of stay at last address
  • Charge or credit card numbers  

Ask for Deposits

Whether your business is service or product-oriented, you can require clients to make upfront payments.

Service Business

With a service business, you could request for between 20 and 50 percent upfront payment. You receive the remainder as you cross certain milestones.     

Product Business

If your business is product-based, you could base your deposit figure on industry standards. Alternatively, ask clients to make fifty percent pay payment.

Create a Late Account or Notification System

Develop a program that alerts you of late delinquent accounts. You could use accounting software programs which give you these overdue invoices alerts automatically. Assign someone to regularly update the system. This overdue alert system let you know 2 sets of important details, namely:  

  • How much money your debtors owe you
  • The due date(s)   

Record Every Transaction Aspect

Document your customer’s owing monies and due date on the sales contract or the purchase order. Go through the documents with your customer. Ask your client to sign the documents. Always document any compromises or changes in the original agreement. The benefit of doing all this paperwork is that in case your client defaults, you will have documentary evidence to back your payment claims.         

Overdue debtors’ accounts pose risks to your business. The unsettled debts disrupt your cash flow. Such disturbances hamper your business’ operations. You need to devise ways of minimising the possibility of defaulting debtors. These measures minimise the possibility of delinquent accounts and overdue invoices. Some viable strategies you could implement include: accepting charge and credit card payments; avoiding credit transactions; checking potential debtor’s credit history before extending credit;  asking debtors to pay deposits; asking debtors to read and sign invoices and contract documents; and creating an overdue account alert system.

Copyright (C) 2016, Simple Alliance Kenya Limited

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