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Debt Collection for Professional Services: Understanding Specific Risks

Thursday, May 29, 2014 - Posted by Philip Harvey

As with any progressive businesses with growth aspirations, the importance of strong cash flow in Professional Service organisations should not be underestimated. In particular, the two elements of credit control and debt collection play critical roles in maintaining strong cash flow.

This article aims to provide guidance on the processes required for credit control and debt collection within the professional services sector. It can be used as a starting point that organisations can then use to develop a framework for maintaining strong cash flows.

Understanding the different risks of your client base

Before professional services organisations can design an effective credit control and debt collection process, they must first understand the different levels of risk arrears within their existing client base. This will require a ‘Risk Analysis’ approach to collections that which will be unique to every organisation.

 

Once the client base has been categorised by risk profile then the next step is to develop strategies for ‘Preventative Action’ - to limit the quantity of accounts that fall into arrears.  And ‘Targeted Actions’ – That ensure the relationship is maintained whilst payments are swiftly collected.

 

We’ve outlined some possible risks Professional Services organisations may encounter when reviewing their client base and accounts that are in arrears. The list is by no means exhaustive and should be used as a starting point in developing a process.

Clients Comprising Large Organisations on Payment Terms of 90 Days

In the above class of client, the overall risk of non-payment is relatively small. However, given the potentially large nature of the client business and relatively large payment due in relation to a smaller suppliers overall revenue (say 5% of total revenue). When payment is withheld or delayed then the effects could be potentially catastrophic and further compounded where margins are small.

 

Clients from Small, New or Medium Sized Businesses

Given the high failure rate of new small businesses, it’s safe to say that they carry a high risk of defaulting on agreed payment terms.  It’s unfortunate, but the catch phrase ‘small businesses don’t plan to fail they just fail to plan’ falls true, too often with this category of client. 

Client Organisations from Statistically High Insolvency Rates

A good example of this type of organisation being within the ‘Building and Construction’ Industry. This sector has one of the highest rates of Insolvency, which in turn may attract a high risk profile for your organisation.

 

Rural Based Clients with Cyclical Incomes, Such as Farmers

These clients have historically had an excellent reputation for paying their debts. However your trading terms may not be able to be met owing to timing of the farmers income.

Individuals as Professional Services Clients

Working for individuals often means dealing with a large volume of clients with relatively low invoice values in relation to an organisations overall revenue as is the case of certain types of Law firms, Accounting and Health Practices. At a macro level you might assign a low level of risk to a client where the invoice exposure makes up less than 1% of Gross Income.

When assigning a risk rating to individuals and corporate clients, it’s worth noting that Banks, Building Societies and Credit Unions have very robust systems in addition they have access to data that allows them to rate and apply a risk pricing ( i.e., Credit Card Interest Rates). These tools are often unavailable to regular businesses when applying trading terms.

 

LCollect are a specialist debt collection agency, covering a wide range of industry sectors to achieve the best possible debt collection results for a diverse range of clients. We aim to deliver a sensitive and positive service experience whilst improving client cash flows.

To engage us or if you’d like a free and confidential consultation, please call: (02) 8923-1631 or click here to contact us

 

To further develop a strong robust system for credit control and debt collection, you can read about a preventative framework to maintain cash flows.


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