AccountingWEB members offer their top tips on how businesses and accountancy practices should deal with and prevent bad debts.
Following research showing that HMRC is increasingly using winding up petitions as part of its debt collection offensive, we asked AccountingWEB members how they manage bad debt. This article draws together their words of wisdom.
Good relations
Several members believe key to preventing bad debts is maintaining a good relationship with clients. “We like to think that we are not just providing them with accountancy or tax services, we are being friendly also,” says John Day. “Threatening court action (in 16 years of practice we have only ever once threatened a client with county court action) goes against that philosophy and I think it's terribly sad that some colleagues out there can have spent as much as 50% of their fee-earning time chasing non fee paying clients through the courts.”
Steven Holloway argues that respect is key. “I treat my clients with the respect that I expect from my suppliers and offer normal commercial terms accordingly,” he says. “I extend this trust to new clients and old accordingly and would not dream of asking for money up front (I would never pay up front for a future service, so why should I expect others to do so?).”
As well treating them with respect, for Steve getting to know clients well also proves beneficial. “Clients are people too,” he says. “They are less likely to default on someone they know, someone who is interested and involved with their business and definitely not someone they like!”
Geoff Challinger agrees that it’s all about relationships. “I try and segregate debtors into people who could afford to pay us, those who can't and those who could afford to pay us if they didn't put grumpier creditors before us,” he advises. “In most cases, what works for our lot is regular contact and a friendly prod.”
Admittedly, developing good relations with all clients is probably an ideal world most accountants will never achieve. Frauke Golding said respect must work both ways. “There is nothing worse than to be told by a new client that they only have enough money to pay the (pre SA) assessment and not your fees,” he says. “Then when you tell the client they don't have to pay the assessment because you have worked very hard for them to prove to they don't owe that amount of money - they still don't pay your fees. Respect is a two way street, and it is very difficult to give it, when it gets thrown back in your face.”
Standing orders
Alistair Postle is among several AccountingWEB members who believed using standards orders is an effective way of managing bad debts. “Some [clients I] know have no money so I agree a standing order and get paid eventually,” he says. “They get charged more the following year (interest and nuisance fees are incorporated!)”
John Days adds that standing orders work for the majority of his clients. “Many clients are happy to pay by standing order whilst the majority still pay (over varying periods) on receipt of an invoice,” he says. “I would not take kindly to being asked to pay up front for something which has yet to be delivered - with all the connotations that has in terms of the message being sent to new clients.”
Dean Shepherd meanwhile uses standing orders the moment he takes on a new client. “I get most of my clients set up on monthly standing orders on account of fees from day one,” he reveals. “It is usually easier for them to manage, easier for me to manage, and I always know I have a regular income each month. Of the very few that don't have standing orders in place, chasing them is a pain. I would dread to think how much time I would waste if this applied to all my clients.”
Strict policy
Developing a strict payment policy is the way to go for many members, John Ascough among them. “If I am preparing accounts or tax returns for clients I send them to the client with DRAFT stamped on them, together with my invoice and an acceptance letter,” he says. “When the client return the acceptance letter together with their cheque I then release the final accounts/tax returns for signature. I have been doing this for 16 years and have never had any complaints and very few bad debts
Do it yourself
One of our members has taken the big step of setting up his own debt collection company which does the job. “I not only collect my own problem debts through this company but also those of other professionals”, he says.
Go to court
Unfortunately, some clients will be such bad payers that going to court is the only option. Alexander McLaren gives clients three attempts to pay before taking legal action. “Once billed the client has the terms of our credit in writing. Failure to pay within this time frame will result in 1st, 2nd and final letter adding interest and admin charges as we go,” he says. “If debt is not resolved by the latter then depending on amount owed we will implement external recovery methods. Small claims court if below £750 or AIB if amount is greater.”
With Alistair Postle, slow payers should beware! “I stop working for slow payers and take them to court if I don’t like them,” he admits. “Even the nice clients become enemies eventually if they do not pay – so I should say the nicer they are the longer the credit I will accept. Not businesslike I know.”
Refuse to work
Frauke Golding says he simply refuses to work for bad payers. “I never allow a client to have more than one outstanding invoice, and until it is paid, I don’t do anymore work,” he comments. “I'm not embarrassed to ask, or to refuse to work if I have not been paid. If they ask for time, I am quite blunt about it. I'm not a charity. I'd rather spend the day in bed rather than work for free doing clients accounts.”