As part of the previous chapter, we proposed proactive actions designed to prevent the customer from falling into arrears. We saw that despite these efforts, some of the customers fell behind in their payments, and we had to approach this group with a first formal payment request. The next step is to try to understand why the client is not paying and act accordingly. Here speed is crucial. The faster we act, the faster we will avoid the accumulation of overdue debts and even additional debts and we will show the client the extent of our efficiency and decisiveness and our willingness to solve the problem.
Sometimes, when a customer does not pay on time, he is actually reacting to a problem in the service process or the delivery of the product or to a mistake that he believes occurred in the billing process – so we must show him that we will do everything we can to meet our obligations and then we can demand what is due to the organisation. Speed is not only a financial need, it is an act designed to demonstrate the quality of our service and the organisation’s desire to retain the client. Another reason for a quick clarification of the situation is that a customer who is in debt or who is in some kind of dispute with the organisation is not inclined to place new orders in which the organisation is, of course, interested.
Reasons for non-payment: classification, examples, and corrective actions
Schematically, the reasons for non-payment can be classified as follows:
• Administrative reasons arising from the weakness of the organisation and its collection system;
• Internal administrative reasons related to the client;
• Marketing and service reasons, including commercial disputes;
• Liquidity problems of the customer;
• Abuse of credit by the customer – customers who can pay on time and postpone the payment;
• Scams;
• Reasons related to the country and the national economy (political situation, issuing foreign currency, debt moratorium).
We will now present various examples according to this classification, we will suggest required corrective actions, and we will discuss the involvement of the collection manager in locating the root problems and dealing with their prevention.
Administrative reasons for non-payment arising from the weakness of the organisation and its collection system
The complex problems of collecting money from customers (including arrears in payments) are not only a product of a competitive market and general economic situation, but arise, very often, from a continuous weakness of the organisation which is reflected in its overall management. Even in the extreme case of credit abuse, a significant part of the cases can be attributed to the inefficiency (weakness) of the organisation and its collection system. When a customer feels that the organization is not organised enough and the collection system of the organisation is not efficient and backed up, he will allow himself not to pay on time and sometimes even request credits that are not due to him.
Let’s mention some notable typical failures:
• Defective organizational policy on collection – this refers to a partial, non-uniform and insufficiently flowing policy (subject to different interpretations in the organization), which is not updated and is not integrated into the entire organization;
• Lack of sufficient cooperation between the collection department, the management of the organization and all other business units related to collection to achieve the common goals on the subject. This is expressed by the absence of coordination processes, distribution of powers, information, activity surveys, etc.
• A managerial approach that prefers sales/service over collection in accordance with procedures, and the lack of backing from the managerial level for enforcement actions such as disconnection and/or cessation of product supply. Such a situation causes the formation of an organizational culture of non-collection.
• Outdated information infrastructures and computing technologies that do not match the organization’s needs.
• Communication infrastructures that do not match the organization’s needs.
• Customer dissatisfaction with the quality of the product/service at higher levels than usual.
• Defective collection infrastructures – computer systems that do not meet the needs of the collection system, including lack of fast and accurate flow of external information, and an efficient flow of internal information updates on debit invoices, credits, receipts, advances, attributions, etc. – which creates an out-of-date situation regarding the debtors balances.
Table of reasons for non-payment arising from the weakness of the organization and its collection system:
| Non-payment reason | Corrective measures |
| Failure to register the customer’s payment method. | A monthly check of all new customers who have not paid due to a problem with their payment methods, and immediate proactive activity with the customers to arrange payment methods. |
| Error in registration or failure to update details and address for sending the customer’s invoices | Monthly analysis of all return mail received and proactive contact (phone, email, SMS) to the customers to obtain an updated address. |
| Malfunctions in the automated collection systems | Execution, management and monitoring of an information system on the issued that are detected, opened, on their resolution and on recurring faults. |
| Account adjustments: attributions to receipts or credits that have not been carried out –causing a lack of balance adjustment at the customer level | It must be ensured that customer accounts are adjusted regularly and accurately. Failure to make adjustments on time prevents the collection department from making a correct collection and sometimes presents a wrong picture to the management of the organization’s debtor balances. Also, as time passes, employees might change at the customer and in the organization, and it becomes more difficult to recreate an accurate settlement. Finally, regular matching between the account in the organization and the customer’s own accounting prevents arguments and eliminates excuses for non-payment due to the need for additional checks. |
| There is no match between the invoice and the order at the level of equipment detail, prices, discounts, quantities, partial delivery, etc. | Corrections should be made, as soon as possible, according to the type of discrepancy. |
| Unclear invoice – detail of the equipment, detail of spare parts, manual registration, total detail without separation between equipment, service, etc. | An immediate explanation should be obtained from the relevant parties in the organization and the structure of the invoice should be improved for the future (especially for the customer that complained or for all customers). |
| The invoice does not correspond to the format requested by the customer according to the order | If the change can be made, it must be made immediately and make sure that the paying party at the customer receives a new invoice as soon as possible in a format suitable for the customer. If for technical reasons it is not possible to make the change, contact the customer immediately and try to resolve the problem by agreement as quickly as possible. |
| The organization does not have a certificate of entry/receipt of the equipment to the customer’s warehouse (lost, not signed) or the customer’s confirmation or signature on the performance of the service is missing | The document must be located immediately and forwarded to the client. If it is lost, it is necessary to take care of the corresponding verification documents of the organization, by means of which it is possible to prove to the customer that the delivery of the goods or the provision of the service took place. If the problem is not solved, make an immediate appointment with the sales person or customer service and see how the problem can be solved. |
| The organization promised a credit that has not yet reached the customer | Action must be taken to complete the crediting process immediately. |
| There is no match between the invoice and the delivery note | An immediate inspection of the reason for the discrepancy must be carried out, the documents must be corrected and the customer must receive corrected documents directly to the paying person. |
Table of reasons for non-payment related to the client
| Non-payment reason | Corrective measures |
| The customer claims that he did not receive the invoice. | You must immediately send a certified copy of the invoice and make sure correct customer’s details are updated in the customer database. |
| The invoice has not yet been received by the customer’s accounting department, purchasing unit, etc., or it is stuck with one of the approving parties. | The customer’s approving and paying parties must be identified and documented in advance. Also make sure that the correct address and paying person details are registered in the system for sending invoices. In special cases (for example, any invoice above a certain amount). It is possible to arrange a special delivery of the invoice and a follow-up conversation with the approving party at the customer’s place, to make sure that she/he actually received the invoice and handles the approval for payment. |
| A long and multi-step process for the approval of the invoice and its payment sometimes goes beyond the agreed credit period | At the stage of the sale, the payment approval process must be checked in advance with the customer and check whether it meets the credit conditions agreed with the credit control department. When there is no match, you must go back and ask the credit control department to examine and authorise appropriate and reasonable credit terms. |
| The invoice is in the process of being approved by the client – purchasing, warehouses, economics, accounting, treasurers. | Take care to locate the invoice at the current party handling the invoice at the customer and make sure that she or he passes it on in the approval chain. When it comes to particularly high amounts, it is sometimes necessary to follow every step and to contact every actor of the approval chain. |
| The approving party was not found – abroad, vacation, illness, meetings, etc. | You must follow the developments, verify with the client who the alternative party is and establish continuous contact with her or him until the debt is closed. |
| Unilateral notification of a customer on changing the credit terms without the organization’s approval | Check with the relevant parties in the organization (finance, marketing or sales) and reach to a quick decision internally whether to accept or reject the client’s unilateral decision. The customer must be updated immediately after making a decision, preferably in writing, and from here on update the customer’s credit conditions or act to optimize negotiation processes. |
| “We pay once a month, on the 15th, the deadline has passed, so we will pay next month” | The reason why the invoice was not paid on time must be identified. The organization may not have delivered the invoices on time or it may not have been intended for the appropriate position holder at the client. If the organization has performed everything assigned to it in a proper manner, it must be made clear to the customer, decisively and clearly, that delaying the payment is unacceptable. If the excuse pops up and comes up again, a repeated credit control must be performed in order to decide whether the writing of credit terms in this way by the customer is acceptable to the organization. |
| The client’s accounting has received the invoice and does not know whom to address it to within its own organisation. | It is necessary to verify who is authorized to approve the payment with the customer and follow what is happening until we find the person who approves the payment. Normally, this process should be carried out continuously, even before the customer enters into debt. |
| The invoice was lost at the customer’s place during one of the approval stages | A certified copy of the original must be produced immediately and make sure that the invoice reaches the approving party at the customer. The details of the case, the identity of the delaying factor (if known) and the confirming factor must be recorded – all this to speed up the process in the future |
| Request for additional details to the invoice – system parts, service type, etc. | The provision of the details must be taken care of immediately. If it is a permanent requirement, it must be verified in advance that the requirement will be fulfilled in the following months. If you are unable to provide the customer with the required detail, you must reply immediately and, if necessary, involve the salesperson to amend the agreement with the customer. |
| Inquiries/disagreements regarding charges arising from currencies or interest – an inquiry regarding the manner and reason for the charge and/or an appeal on the charge period and/or an appeal on the charge method (example: too high an interest rate) | A process must be established in advance to provide an answer to the customer and continue the collection process immediately after the explanation or credit is given. |
Table of handling reasons for non-payment due to marketing or service problems
| Non-payment reason | Corrective measures |
| Unsuitable equipment, justified problems with the product, etc. | Urgently transfer to the technical agents in the organization and follow the complaint handling progress until resolved. |
| Equipment not supplied or partially supplied. | Missing equipment or parts must be supplied as soon as possible. |
| The quality of the product or service does not match customer’s expectations. | If the gap in expectations is due to our mistake, the fault must be corrected immediately and the product or service adjusted to what was promised to the customer; If the mistake is due from the customer’s lack of understanding of the nature of the product or service he purchased, the sales or service system must be activated to close the expectations gap. |
| The salesperson’s commitments to the customer were not fulfilled by the product and/or service | A sales representative’s commitment is equivalent to a CEO’s commitment, and action must be taken to fulfill the salesperson’s commitment; if this is not possible, a compromise must be reached with the customer. |
| Problems have arisen in approving the completion of a project/installation of a complex systems for various reasons: no consultant’s approval (usually it is an external consultant); the client’s infrastructure is not ready; delay due to other projects involving additional suppliers who do not meet the terms of the contract; additional requirements of the customer that are not included in the contract; after installation and assembly, it becomes clear that the system does not meet the customer’s expectations and the customer requests the completion of the delivery. | In complex cases, the role of the collection agent is “reversed” and he becomes the client’s representative acting for him within the organization. Failure to complete the project within a reasonable time will cause a delay in payment, and steps should be taken to apply the right pressure on any involved person or department and consider escalating the problems to higher levels in the organization if the client’s needs are not met. |
| Dissatisfaction (justified) with the service. | You should immediately try to create a corrective service experience, consider a gesture to the customer and turn the customer’s dissatisfaction into an opportunity to improve the relationship. The collection representative is here in the first line with the customer and is sometimes the first person in the organization to discover that the customer is not satisfied with the service or product. Therefore, it is important for the collection representative to have the tools to provide an immediate solution to the customer or to carry out an urgent escalation to the service or sales department. |
| A delay in delivery that sometimes causes damage to the customer. | Credit credentials must be defined in advance within the organization. The role of the collection representative is to ensure that the person responsible for the issue in the organization quickly resolves the issue of a potential compensation owed to the customer. |
| An equipment or service order was made without complete paperwork. | The paperwork must be completed as soon as possible, and if it is lost, the sales representative must meet with the customer to settle the matter. As a consequence, the procedures in the organization must be refined. |
| The prices were raised at the end of a special sales promotion (relates to subscriptions) | It is necessary to explain to the customer the validity of the price increase when a sale promotion ends and offer him viable alternatives to assure the ongoing relationship. |
| Issuing a partial invoice that is not in accordance with the terms of the order. | A partial payment or issuing a credit and/or a refund must be coordinated with the customer according to the terms of the order. |
| The client claims that he suffered damage because the payment was made for “milestones” in the projects – invoices were issued that were not in accordance with the contract or disputes arose about the date of issuing the invoice, the amounts, etc. | The invoices must be adjusted to the terms of the contract/order and we need to make sure to obtain confirmation from the customer. |
| An invoice was issued by mistake – the customer notified the cancellation of the service, the supplier did not update. | Depending on the terms of the agreement with the customer. If the service or equipment was not provided, the charge must be canceled immediately. |
| An error in the invoice amount following an incorrect order | The charge must be corrected according to the terms of the order and confirmation must be obtained from the customer. |
Table of handling reasons for non-payment due to customer’s liquidity problems
| Non-payment reason | Corrective measures |
| Liquidity problems with the client – one-time or temporary. | When the customer provides an explanation for non-payment on time due to a liquidity problem, it is extremely important to understand whether it is a temporary situation or an ongoing problem. The customer’s behavior can provide us with information about this: a customer who contacts in advance and apologizes for a temporary problem is more reliable than a customer who does not repay the debt without anynotice. The factors that will affect the organization’s response to a late payment are: the size of the debt, the type of debt (product or service), the manner of payments over time, the results of credit checks and other risk levels. In these cases, the organization must consider, as part of its policy, a extention of the repayment terms, with or without collateral, as well as exercise an regular monitoring of the customer and his debts. |
| Persistent liquidity problems | When the liquidity problem persists, we need to begin acting to reduce the organization’s exposure (for example, by requesting additional collateral, reducing activity or changing the terms of payment to cash only until the accumulated debt is fully repaid). |
| Customers who are in severe liquidity difficulties, including those who are in different phases of insolvency proceedings | The provision of the service and/or the supply of the products must be stopped immediately. The case must be transferred to the legal department as soon as possible in order to be legally registered as a creditor of the debtor. In cases where a temporary liquidator is appointed and the liquidator wishes to continue providing the service, a new contract must be signed with the liquidator which will guarantee payment from this point on. |
| Payment problems/budget spending issues with public sector clients and other budgeted organizations | Assuming that the order was made according to all the rules, so that it was budgeted and approved by the customer, it is usually a temporary technical problem that finds its solution within days to a few months. However, it is important to understand that the length of time for the repayment of the debt depends not only on the rate of the budget flow to the client, but also on the relative assertiveness and efficiency of the organization and the collection agents. |
Table of handling reasons for non-payment due to unagreed extensions of credit by the customer
| Non-payment reason | Corrective measures |
| The check was sent yesterday | Best excuse ever… check the next day if it was received in the mail, and if not – contact the customer again and don’t let go. |
| The check is ready – there is no one to sign (the manager is sick, abroad/on vacation) | “Oh..what a shame…” – but at the same time, the authorized signatory on duty must be located and make sure that he signs a check and immediately forwards it to the organization. |
| The computer crashed, the check/bank transfer is signed, call tomorrow, we’re busy, we’ll take care of the issue in the next few days… | To call the next day and make sure that “the computer was restored”… The management of the calls must be assertive so that the client quickly understands that there will not be many more opportunities to “take time”. If a lot of time passes between conversations, the customer will be able to come up with a different excuse each time and thus the payment will be rejected (if this is indeed his intention). If it is a “sting” or the customer is insolvent and cannot pay, it is very important to quickly draw conclusions and act accordingly. |
Dealing with scams and “sting” exercises by customers
| Non-payment reason | Corrective measures |
| Fraud and “sting” exercise – “the order is not ours”… | Act immediately to locate the source of the fraud or sting. It is important to find out if it is the customer himself or if there is a third party hiding here who is using the customer’s identity for the purpose of committing the fraud. If needed, have someone visit the customer’s facilities as soon as possible. |
Dealing with reasons for non-payment related to the state of the country and the national economy
| Non-payment reason | Corrective measures |
| Country risk (war, coup, nationalization, moratorium order, foreign exchange prohibition order, cancellation of import licenses). Sometimes, the client’s lack of liquidity is due to a country problem at the national level – for example, it is possible that the country where the client operates imposes restrictions on the transfer of funds abroad. | The reason for the non-payment and the estimated time for its continuation must be examined carefully. One should consider reducing the exposure to the customer through stopping service or stopping product supply. |
Involvement of the collection manager in dealing with non-payment problems in collections
Identifying the root problem and dealing with its prevention
Quick handling of a customer’s objection to payment is a reality-bound necessity – this is the role of the collector. On the other hand, the role of the collection manager is to identify recurring patterns, analyse them to diagnose the “root cause” common to a large number of customers with delinquent debts, and try to find large-scale and long-term solutions for them. It is important to remember that the field of root causes is dynamic and that every change in business reality, every organizational change, every new version or new development of a product or service in the organization is likely to give rise to new root causes, so the process of locating and analyzing must be repeated every few months or every year (depending on the frequency of changes).
The collection manager notices that he has an increase in new accounts receivable from customers, that is, an increase in customers who do not pay their invoices on time. A preliminary analysis of the new debts allows him to identify that most of the new debtors are customers who ordered installation at the customer’s home in a certain area. Investigating customer complaints will reveal that in the area in question, the contractor performing the installations performs his work negligently, does not arrive on time, makes the customers’ homes dirty and sometimes leaves the customer’s home when the supplied product is not properly installed. In this case, the root cause for non-collection is the defective installations and replacing the contractor will solve the collection problem. There are several techniques for finding root causes that are widely presented in the literature and on the Internet.
We believe that in addition to the ability to identify the patterns of non-payment and their motives, the collection manager has the power to deal with the general problems he identifies in a focused and direct manner, to act for their immediate solution as well as to take planned measures to reduce them in the long term. Here we will offer some examples:
The collection manager’s dealing with non-payment problems arising from the customer’s liquidity:
The collection manager can demand from the credit department that credit controls be tightened so that there will be extra care on the solvency of the new customers.
The collection manager’s dealings with non-payment problems related to the organization’s internal issues:
The collection manager must keep up to date at all times, and when delinquent debts are discovered that are not caused by the customer, he should take care of establishing immediate contact with the customer to straighten out the collections and cancel his objection to payment. In the long term, when he identifies organizational root causes that trigger the formation of debts in arrears, he should initiate intelligent ways in cooperation with the management and the other relevant units to find cross-organizational solutions – as he continues and assumes personal responsibility for the necessary optimization processes, and constantly avoids placing blame and transferring responsibility to others, despite the fact the failures are not always in his direct sphere.
The collection manager’s dealing with intentional customer arrears and unagreed extensions of credit by the customer:
The collection manager can work to educate customers to pay on time, by ensuring assertive and immediate responses to any customer’s entry into arrears, or by providing incentives to the customer to switch to payment methods that are more convenient and safer for the organization (such as a special discount on payment by credit card). The role of the collection manager is to eliminate any factor that provides the customer with a reason for non-payment. Therefore, the work procedures of the debt collectors should be clear and include a commitment to a schedule for execution (SLA Service Level Agreement) defined in advance to provide a solution to the customer. Regarding those customers who pay in arrears over time, “preventive care” processes must be taken as detailed in this chapter.
Recommended controls for monitoring the reasons for overdue debts and how to deal with them:
- Collecting data on the reasons for non-payment and monitoring if the decrease in the number of cases over time will indicate that the real root problems have indeed been identified and properly addressed.
- The distribution of reasons for non-payment in the economy (from articles from the press or reports from companies for business information).
- The distribution of reasons for non-payment in the organization over time.
- A long-term follow-up table for each main reason separately, in terms of the number of customers and amounts of overdue debts.
Any deviation from the average route will oblige the credit and collection risk manager to deepen the analysis to identify the reasons for the change, and the meaning of the change and make operational decisions to improve that index.
We recommend setting an annual goal divided into months and reacting quickly to any deviation from it.
NEXT: Debt collection in arrears, phase 3: Collections enforcement