Why accounts go overdue

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Last updated on December 22, 2014

Being aware of the reasons that accounts go overdue can help you put management processes in place to lessen the risk for your business.

Common reasons for overdue accounts are described below, along with tips on avoiding or minimising potential impacts on your business.

Misunderstood terms

  • A standard copy of your trading terms should be provided to the customer when an account is opened to lessen the possibility of misunderstandings.
  • Train your sales employees to reaffirm trading terms with customers.

Grievance or dispute

  • Speedy sales or technical action is needed to resolve problems.
  • Properly maintained customer records will help you to identify unusually dispute-prone debtors and enable you to take precautions.

Carelessness and inefficiency on part of debtor

  • Careless and inefficient debtors are prone to overlooking accounts that are due.
  • You may need to issue reminders and copy invoices to obtain payment.

Small amount involved which is ignored until account becomes larger

  • This is a delaying tactic used by debtors, rather than outright avoidance.
  • You must be firm and persistent to obtain payment.

Consistently slow to pay

  • Appropriate checking at the time of opening the account should help you identify this trait in your customer.
  • Most debtors in this category will use tactics ranging from the well-worn 'the cheque is in the mail', to complaints about products or services.
  • Constant follow-up is required and you need to recognise the costs associated with managing this type of account.

Poor business management

  • This is the main reason for difficulties in credit management.
  • You should carefully assess timeframes associated with payment plans offered by debtors in this category.  While entered into with good intentions, they are frequently not kept within acceptable limits.
  • This type of account represents marginal business and you should decide whether it is worth carrying.

Temporarily out of cash but good risk

  • You can enter into special arrangements on a one-off basis with this type of debtor.
  • You need to ensure, however, that it does not become a regular occurrence.

Ability to pay but lack of will to pay

  • You need to adopt a firm collection strategy with this type of debtor.
  • Persistence may be needed because debtors in this category will often only pay after legal action is taken.

Over-committed financially

  • Over-commitment may be due to illness, unemployment, some kind of crisis or because the debtor is unable to manage their finances.
  • Solutions may take the form of education, financial counselling (financial restructuring may be necessary) and, where appropriate, working out a mutually acceptable payment plan to clear the debt.

Fraud – blatant dishonesty

  • You must be prepared to commence legal action immediately and, where appropriate, have such cases listed nationally with a debt collection agency.
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