Five Vital Rules of PayPlan
What is a payplan? Typically, payplan is a short-term B2B debt repayment scheme over 3-4 installments. Both parties sign a legal agreement detailing the T&Cs for allowing continued supply of service or goods while simultaneously paying current and legacy debt.
In many instances a payplan could save your customer from bankruptcy and prevent your business from incurring a very expensive loss. However, all will be for nothing if you have ignored the warning signs that will lead to bad debt write-off. If any of one of the symptoms listed below emerges during one of your regular debtor reviews, you need to act fast to engage sales and set up up a meeting with the customer concerned.
Payplan is not a guarantee your customer will survive. Sometimes the payplan can come too late in the sequence of your customer’s financial demise. The sooner you spot the warning signs the quicker you can take action with your sales/account manager and the customer to help get your customer back on track.
Full rehabilitation of the customer is easier said than done. It is a difficult and painful process. But it is by far so much better to attempt a rescue than pay the heavy price for leaving it too late. Communication is key to success. If you write-off this debt, your sales people will typically have to sell ten times the value of the debt to stand a chance of recouping the loss. They will never thank you for this. Find a way to help the customer. More about this aspect another time.
The sales director with his sales and account management teams, the CEO and CFO through to your boss and the marketing department DO NOT like losing customers. But everyday a financial crisis can and does strike somewhere. Tomorrow it could be at your business.
After you have briefed your boss, the sales director and the account/sales manager and received their approval, put the customer’s account(s) on hold. Then call the customer (owner or CFO) to explain why you are calling and what must happen. Arrange for a meeting to be held with the customer’s finance management as soon as possible. Remember that no matter how high risk a customer is, your business still values the revenue they can generate. In the early days of the business’s growth, revenue was king while risk management was not yet a consideration. So the customers mix then was likely to consist of financialy solid and risky customers.
Your job in credit control is to manage and exert certain confines over your customers’ trading relationship with you depending on their risk classification. Your company agreed these terms with the customer, (ie:credit limits, payment terms, bank guarantees, prepaid accounts, dispute logging process etc), in return for the supply of goods or service(s).
What follows is the stuff we credit people work for and drool over. When all is said and done, getting a PayPlan agreed with a cash strapped customer and officially signed off is the stuff we can excel at. This is where we “backoffice” grey-suited-money-chasing-negative-brigade-of-doom folk get the chance to shine bright and prove overwhelmingly that we do deliver added value to the companies we work at. The bosses just do not know or appreciate it fully. Yet.
LAW #1: Minimise Exposure
The single most important guiding rule:- minimise your business’s exposure to bad debt by recouping 100% of the legacy debt while carefully managing recurring debt through payment (cleared funds) on or before due date.
This drives all following actions you take to recoup debt and helping the customer trade through their crisis. Payplan is an effective tool to help you manage the situation and minimise your exposure to loss.
If you do not get your legacy instalment and current dues paid by the scheduled date, you must immediately suspend services.
To help establish the payment values, you need to calculate the diminishing exposures through to the end of the paylan. Below is a sample exposure templatewhich you can download by clicking the button below.
LAW #2: Full Disclosure
Helping to save a customer from total collapse involves a series of meetings to review the situation and then to negotiate the terms. During the course of these events, cunning brinkmanship will be used. The customer will do their best to outwit you because they do not want to let you too near their business in case you catch a whiff of the catastrophic financial disaster they face. Meanwhile you must get creative and keep trying to bash through your customer’s barricades which prevent the truth and depressing details being seen. It is just the way it is. You will prevail but beware of the small supplier who is owed money whose pre-emptive and kneejerk legal action could cause you to lose a lot of money. Acquaint yourself fully with your customers suppliers. Stay aware of what their intentions are. Communicate with them if you deem it necessary.
Get it off your chest – Bare it all
As credit controllers we must remain focused on the problem in hand before going into spreadsheet heaven to analyse and pick over the financial affairs of the stinky carcass that could soon be a very, very expensive ex going concern. Move quickly to the next phase.
LAW #3: Review financials to decide to recoup your debt
Who said credit was boring?
#2:-Can you recoup the unpaid debt still owed by the customer?
When you or your controller detects a growing trend of payment skipping or delay, you must trigger investigative actions. Stage #1 is to meet ASAP with the customer and get facts.
Typically, your customer will want to meet to see if you can help them. Quite how you can, depends on how serious they are about continuing to trade.
Meet the customer, preferably their finance director who can answer your questions honestly, properly and in detail.
LAW #4: Will the customer provide the financial data you need?
Is their determination to trade on serious enough to permit you access to their financial data?
You will know the answer better than any because the knowledge about the customer is gained from your regular communications and previous meetings with the customer. You will or won’t detect their sincerity to co-operate and do their best to trade through. It is their sincerity and determination to survive that you need to tap into to gather essential financial information and reasons for the crisis. This is pivotal to a successful 100% recovery of all legacy debt. If the customer prevaricates and you don’t detect a determination to liquidate their indebtedness, your job just got ten times tougher.
Your customer should be jumping with joy that you are trying to arrive at a mutually beneficial solution. On rare occasions when you realise it is beyond the means of your customer to ride out the storm you should wrap this project up immediately. Hand this matter over to your legal office. The account is now inactive and comes out of the ledger.
On the other hand if you have a customer who does tick all the correct boxes and they are up for the challenge to survive the crisis then move to the next level. This is the most important stage which can be the deal maker or breaker.
LAW #5: Your customer must support the PayPlan
You can cut the tension with a knife!
The Five Vital Rules of PayPlan are tough. Seriously tough, but they must be obeyed or you will lose a lot of money. You have succeeded to bring your customer to this stage. This is good because here is where you get to tell the customer the FIVE RULES and what it’ll take to survive and trade through the cash crisis. She is not going to like what she hears. Yes, she’ll nod her head in agreement but whens she leaves the meeting, reality will kick in and force her to review how they’ll come through what will be the toughest period of trading ever.
These are the Five Vital Rules you need to get agreed:
1. The legacy debt must be paid in full by way of no more than X monthly instalments. Interest is optional.
2. Current bills will be paid in full with the instalment on the date scheduled and agreed.
3. Pay one day late and the deal is off. All unpaid debt becomes due immediately.
4. All invoices will be paid in full. No disputed values will be deducted. Disputes can meanwhile be logged for investigation.
5. The PayPlan will be drawn up into a legally binding agreement to supersede existing agreements for the PayPlan duration.
At other businesses you might not have the responsibility to lead the events. You might have to hand this matter over to a senior manager or to another department. But in the main, the credit manager or credit controller will have to drive the matter to a successful conclusion – payment in full with no bad debt write-off.
Not an enviable circumstance to find yourself in. But guess what – it goes with the territory right? And you can do it.
* If aged debt occurs, the finance policy will have provided a certain % against the write-off once it went unpaid >60 days. Probably 25% at 60 days then 100% after 120 days.
Many thanks for reading and for visiting my site!
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