Customer debt, what is it?
What are the challenges of customer receivables for the company?
How to manage customer receivables?
Definition of customer receivable:
A trade receivable is a debt owed by the customer to a business. Trade receivables consist of all unpaid invoices to the company whose due date has passed. They therefore do not concern invoices that are pending payment. The reverse situation (receivables owed by the company to its suppliers) is called supplier debt.
A trade receivable is defined as such when:
A business has sold a good or service to a customer:
An invoice has been issued;
She was not paid in time.
Not only is a customer receivable expensive to manage, but it also induces a risk for the company, which is necessarily less profitable if it is faced with an unpaid debt.
A receivable is a sum of money that a company must receive from one of its customers. When a company delivers a product or service to a customer by granting him a payment term, the amount due becomes a debt. If the debtor (the one who must pay the settlement) does not pay his debt on time, the latter then becomes a non-performing debt or an unpaid debt.
What are the challenges of customer receivables for the company?
The impact on the company's cash flow
Of course, an overdue or unpaid debt represents less liquidity in the company's cash flow. Hence the importance of upstream provisioning in order to deal with this inconvenience. For small customer claims, the company with good financial health must be able to cope during the period of time when the claim is a pure loss of earnings for the structure. If debts accumulate, or if one of them is particularly important, they can constitute a brake on the development of the company. Ultimately, it is the need for working capital that will be reduced.
Consequences on WCR (working capital requirement)
Structurally, payment deadlines and delays impact the WCR (Working Capital Requirement) of the company, these delays must therefore be combated because:
It is cash which is immobilized with customers and which is not yet available for the company, which could create an imbalance at home, or the impossibility of financing investments, or of seizing new opportunities.
These delays carry a risk of default and to overcome this it is advisable to cash in as quickly as possible: as long as the payment is not made, we cannot be certain that it will be.
These delays are a brake on the competitiveness of the company because they mobilize resources for recovery while these resources (dedicated staff, outsourced service providers, sales team time, etc.) could be better used to develop turnover, or to optimize other tasks, or to reduce operating costs… These resources represent a cost attributed to an unproductive mission.
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How to manage customer receivables?
Many companies report late payments. To avoid this situation, it is essential to set up suitable processes in order to reduce the risk of non-payment or late payment.
To best manage trade receivables, you must keep your accounts up to date. The customer relationship must be followed from the beginning of the relationship to the payment of the invoice. It is necessary to identify the customers who often exceed the payment deadlines by setting up a follow-up of the payments with Excel for example. You can also use cash management software that will send an alert in case of late payment.
How to collect customer receivables?
There are several forms of debt collection, namely:
Amicable recovery:
Amicable collections are all actions that a company can take on its own to recover the money owed. At this stage, the company is not obliged to call on a company specializing in collection. Amicable collections then take the form of simple letters, but a certain formalism must be respected, in particular the identity of the parties, the amount claimed, or even the deadline for repayment of the debt.
Invoice collection with formal notice:
In the event of failure, a second follow-up with a letter of formal notice by registered letter with acknowledgment of receipt or by bailiff, setting the debtor a period of 08 to 15 days, for example, from the date of receipt of the letter. .
Litigation recovery:
If the amicable collection has remained unsuccessful, the creditor has no other choice than to seize the competent courts in order to obtain an enforceable title to oblige the debtor to pay his debt. In case of refusal, he exposes himself to heavy penalties.
External covering:
In the absence of human resources, time to carry out the recovery or in addition to the internal recovery, the company can also decide to entrust this mission to a company specialized in the recovery of debts.
Tip To avoid late payments, potentially doubtful customers must be identified in advance. The company can reduce the risk of insolvency by signing a contract with its customers. It can also find out about their solvency from other market players, for example.
Finally, the payment terms and deadlines must appear on each invoice, as well as the compensation to be paid in the event of delay.