If you are in business then you are undoubtably familiar with credit control. Credit control is one of the most fundamental building blocks of establishing and maintaining a viable company.
There are a number of aspects to credit control:
• Deciding who should have credit – the issuing of credit terms to customers following approval based on their credit score.
• The amounts of credit that customers should have and the terms – for example 30 days, 60 days, and so on,
• What is the procedure if the customer doesn’t pay on time?
If credit control is mismanaged the consequences can be dire. Otherwise solvent businesses can become insolvent because of improper and uncoordinated issuance of credit to customers and the subsequent failure to collect money that is due.
Before you make a sale
In order to safeguard your business, you must be satisfied that your business will receive the money it is owed in full and on time from your customer.
Here are some ideas to help you to minimise any disruption in the flow of cash to your business.
• Create a clear credit control process. Ensure that the process begins at the placing of the order and ends when the invoice is paid. Everything in between must be set out in a clear strategy and managed professionally.
• Make sure you obtain the necessary business information, including the customer’s full trading name, legal status, registration number, address and the key contact details of the person responsible for accounts payable.
• Obtain credit reports to check the credit risk posed to your business by the potential customer. Online credit checks can be completed in a matter of minutes and this is very important when taking high-value orders from larger customers where the late payment can carry serious consequences
• Have a clear plan as to who will chase the invoice and how often. Courtesy calls and letters should be sent out to an agreed timetable stating politely but firmly that the customer does have an obligation to pay you.
• Your credit control process should also build into the timeline the actions to be followed should the customer’s payment become overdue. At the end of the process, as a last resort, the debt should be handed over to a commercial debt collection agency.
• Ensure your credit control department generates a stop list or watch list of companies who are known to be late with payment or, worse, not pay at all.
After you’ve sold
It is important to begin the process of securing payment upon completion of work or delivery. The invoice should be sent to the customer as soon as possible. Using electronic invoices is a quick and reliable way to ensure that the customer has received the request for payment.
It is good practice to make a courtesy call to ensure that the customer has received the invoice and all is in order.
Make sure the invoice is accurate as any mistakes can be disputed by the customer and thereby delay payment further.
Ensure that your customers are aware of your terms and conditions of payment, when it is due, and how you expect to be paid.
You should also explain the credit control procedures in the event of late payment from charging interest, taking legal action, to referring the debt to a specialist commercial debt collection agency.
Make sure that your credit control department has had the relevant training in how to establish and maintain a positive relationship between them and the customer.
Ensuring that you are paid on time and in full whilst avoiding upsetting the customer is a skilled balancing act.
What happens if a client pays late?
Once you have become alerted that a customer is going to exceed their credit terms, there are two things that you must consider. The first is the impact this will have upon your cash flow. The second is the best way to go about recovering the debt.
You need to take account of the impact upon your business that the absence of the expected revenue will cause. If this means that your cash flow becomes disrupted and your own payments to creditors become jeopardised, then you may wish to consider renegotiating some payment terms with your creditors.
Don’t overlook the importance of perhaps asking for early payment from another customer with an incentive such as a small discount for early payment as a way of boosting your cash flow.
Keep your bank involved with any changes to your cash flow and forecast as necessary.
Make sure to inform your customer of your intention to charge interest through the Late Payment of Commercial Debts (interest) Act 1998. And the absence of payment may also result in you handing the debt over to a specialist commercial debt collection agency.
Keeping on top of payment
There are many things you can do as a business owner to ensure the efficiency of your credit control department. You may already be putting into practice these procedures, but if not, then perhaps it is time to re-evaluate the efficiency of your credit control performance.
• Evaluate the performance and value for money of your credit control department on a regular basis.
• Consider protection against late payment. Credit insurance protection is a way of ensuring that your cash flow is not damaged by late payment and bad debts of companies who have become insolvent. Policies can be tailored to meet your specific requirements. Individual invoices or debtors can also be covered separately.
• Depending upon your company’s circumstances, you may wish to outsource or hire credit controller. That way one person can keep an eye on every aspect of your business and keep you informed of any pressure points.
• Maintain a strong relationship with your bank. It is important that you can approach your bank for help if you find that cash flow challenges are affecting your business.
• Thank customers who pay on time. It may give them an incentive to keep doing so and is good for customer relations.
For more information on credit control and cash flow, please call 0333 202 7198 or email [email protected]