New Zealand Law Society - Successful debtor management

Successful debtor management

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One of my longest-standing friends, James*, managed a business for the company’s board of directors for just over two years.

During his time at the helm he almost quadrupled the firm’s turnover and lifted its profits by just over 280% (not annually, but over the time he was manager).

Another highly significant result was that in the time James ran the business there was only one debtor that did not pay their full bill. James’s company received 19 cents per dollar owed, as that debtor firm had gone into liquidation.


That is an enviable record. So what was the secret of James’s success?

I interviewed James because my impression is that many businesses, including law businesses, can learn from his success.

“The first thing for me,” James says, “is that I don’t think it’s a good idea to let debt collection agencies take over what really is part of your business.

“Also, I’ve got enough Scots blood in me to really squirm at the idea of having to pay someone for a service if I can avoid it.”

Rather than being something to outsource, James says he sees following up people who have yet to pay you as being part of your evaluation of the service you are providing your customers.

“You can think of late paying as a possible symptom – something you need to pay some attention to,” he says.

“That, in a nutshell, is how I viewed following up on unpaid bills. While it can be tempting to jump on the phone and immediately start talking about the money you are owed, that was not the approach I took.

Following up

“My instinct told me that talking about the money was not a good way to start this type of negotiation.

“First of all, I would very rarely use the phone. I would pay my customer a visit if at all possible.

“Then the first thing I would talk about wouldn’t be the money. I’d ask my customer how they were finding the service we were providing.

“That was interesting. Most of the time they would tell me that it was ‘good’ or even ‘great’, with the occasional ‘okay’, or words to that effect. Sometimes, however, they would talk to me about something which gave me ideas for how my company could lift its game.

“In fact, looking back now, I think I was actually tapping in to some very useful information that many businesses are paying good money to market researchers to discover.

“It often gave me useful insights into my customers’ perspective on me, my staff and the company’s performance generally.

“Even when they said ‘good’ or ‘great’, I would follow up with a question something like: ‘is there anything you can think of that we could improve?’

“I’d then thank them for their feedback, before getting on to the reason I was visiting them in the first place – the money.”

Softly, softly

Even when he started to talk about the unpaid bill, James says he did not approach the matter in a “demanding” way.

“I’d try and start with something soft – something like ‘I realise this year hasn’t been such a great one for business’ and then I’d follow up with something like ‘but it would really help me with my cash flow management if you could let me know when you will be able to pay your account with us’.

“Almost all the time, I would get an answer.

“Quite often, in fact, I would get a cheque on the spot. Others would say they would arrange the payment in the next few days.

“And almost all of the time, my ‘slow payers’, as I would call them, paid within the time frame they said.

“I was actually a little surprised at how well this approach worked, particularly after hearing stories from other people in business and some of the difficulties they had with bad debts.

“I never once had to take anyone to [a debt collection agency].”

Difficult customer

James’s most difficult customer was a fellow businessman.

“The first time I saw him, he said he would pay me at the end of the month. Our terms were payment on the 20th of the month following invoicing.

“He did pay, but that meant I had to effectively carry the debt for 40 days more than I would have otherwise. On the $5,000-plus bill he had, that meant I was providing him with use of money that had something like a $40 value, assuming a 7% interest rate.

“He was a regular customer, so I just kept visiting him every month. Over time, however, he got even further behind.

“That’s when I did get a little more assertive. I said that I wasn’t able to provide him any more leeway than what I was already providing him, and that if he got any further behind, I would need to consider stopping providing the service to him.

“Without so much as blinking an eye, and in a very friendly manner, he said he would pay me the next day.

“He did. Any he didn’t get any further behind.

“Naturally, of course, I kept popping in to see him once a month at least.”

The other very interesting thing he learned about this businessman, James says, is that he used a number of other businesses in the same way.

“I first found this out at a Chamber of Commerce meeting. We were having a few drinks when one of the people in the group I was chatting with asked if anyone else was having trouble with this character paying his bills.

“Over the next few weeks, I asked other businessmen around the place, and this was quite a pattern. He was using us all as an overdraft facility.

“It looked like being a mere three months behind was good in his particular case.”

Follow up

“I’d say that about 70% of debtors I’d visited paid on time or just a little bit late after that first visit.

“Those that didn’t would know why I was there the second time around. Some of them, in fact, indicated that quite quickly and said they would pay without me having to say anything.

“With others, on my second visit I would start by asking them how they were finding the business climate, if they were a business. If they were an individual, I’d ask them something like how their family was, although I didn’t get too many individuals who were problem payers. In fact, from memory there was only one I had to contact twice.

“There was only that one business I had to visit every month. But there were five or six I had to visit more than twice.

“The important thing is to keep following up, because the vast majority of poor payers will turn into reasonable payers if you do, in my experience.”

After just over two years as a manager, James was head hunted and returned to providing professional services in a senior role as an employee.

There was a sequel to the story, however. About three months after leaving the role, the new manager rang him to ask how he managed his cash flow. The business was then struggling with cash flow, and debtor control was one of the factors.


James says that he believes there were three secrets to his success with getting people to pay up.

The first is that he didn’t leave it too long. “In our business the terms of payment were the 20th of the month following the invoice. I would start contacting people on the 27th with the aim of contacting them all by the 29th.”

The second was that the main conversation was about how he could better help his customers, and that was how the conversation began. “The money always came second”.

And the third was that it was “a conversation, rather than me making demands, or even threatening them with things like [a debt collection agency] or taking them to court. I usually visited them in person, but you can do the same thing by phone. The important thing is that your customer knows you are listening to them.”

* James is not his real name. While he agreed to be interviewed by LawTalk, he was adamant that he did not want his name published.

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