Credit Control In Growing Business
When you are running a business, cash is king. Irrespective of the lucrative margin you have on your product or service, if you run out of the cash required to deliver it – you may well go bust before you realise your profits.
In many businesses – whether product or service based – money is spent acquiring and preparing the product or service for delivery, before payment can be obtained from customers. In an expanding business it very easy to get to the point where there is not enough cash available to service the next round of customers – because you are still waiting for earlier customers to pay up. In many instances businesses end up borrowing through overdrafts, factoring services, etc. to fund the gap. This is a cost to the business that could and should be minimised otherwise you are effectively paying credit charges for your customers.
Credit control is about managing the credit relationship you have with your customers in an effective way so that you can minimise outstanding amounts – whilst maintaining a good and profitable relationship.
Good credit control starts during the sales process:
- Discuss your fee/price and payment terms with the buyer and be sure that they understand these. Agree a credit limit if appropriate. Use the negotiating tactics described in the paragraph below to offer incentives for early payment.
- Obtain details of trade references relevant to the type of product that you are providing E.g. if you are offering a bespoke software that is likely to cost the client thousands it is not very useful to know that they pay their milkman on time.
- Find out who will be responsible for approving invoices be sure that you have their contact full details as well as those of your buyer
- Find out when the company normally makes payments e.g. some organisations only do cheque runs once a month or even once a quarter – you may want to plan your invoices to them before instead of just after their payment dates.
Negotiating the deal. Most customers like being offered the opportunity to save some money. Instead of refusing to consider discounts (or worse still providing discounts for no reason), you may use payment options as the opportunity to create a win-win situation. Examples of some offers you may consider are below:
- In many cases it will be possible to request a proportion of your payment up-front with instalments during the job or upon delivery – this should be your starting position.
- Offer customers payment options with incentives that encourage them to pay earlier rather than later. E.g.
- If you are offering a service: x% discount if payment is made by instalments during the life of the project; y% discount for payments made by a specified date (maybe 5 to 10 days after invoice date);
- If you are offering a product: x% discount for cash upon delivery; y% discount for payments made by a specified date (maybe 5 to 10 days after delivery date);
Well done you have won the sale! Whilst congratulating yourself and looking forward to a beneficial relationship on both sides, it is worth applying the relevant elements of your credit policy (see below) to ensure that you are accepting good business. The remainder of this paper looks at some of the elements of good credit control and how to apply them.
General good practice
Credit policy.
Have a credit policy. Your credit policy will set out what type of customer and size of order requires:
- Credit limits
- Credit searches
- Bank references
- Trade references, etc.
Your credit policy must be dependent upon what your competitors are doing, what your suppliers require of you and the type of customer you deal with. However, it is not worth the paper it is written on if it is not applied. You should ensure you have checks in place to encourage/enforce consistent use.
Credit searches
You need to be sure that any new customer you take on is able to pay. Dependent upon the size of the order or the credit you wish to extend you may want to take up trade and bank references or carry our credit searches.
The results of these checks will allow you to make a better-informed decision as to how much credit you extend, for how long and how aggressively you will chase unpaid invoices.
Title
Where possible retain title to the product or service until it has been fully paid for (This can be done via your terms and conditions of trade)
Terms and conditions.
Have relevant terms and conditions of trade that set out clearly your responsibilities and that of your customer in any transaction. This is a legal document that you may want to rely on in order to enforce payment terms or to retrieve your property so you should really have a lawyer draw this up for you.
Invoicing
Invoice promptly and accurately. Very few customers will pay unless they receive a valid invoice. The longer you leave off invoicing the longer it is before you have any chance of receiving your money AND the more likely it is that staff movements and errors creep into and delay the process even further. Invoices containing errors are an excuse for the customer not to pay.
Invoice tracking
Keep track of the ages of your invoices. In some cases you may want to remind the customer just before the invoice is due in other cases you may wait until the invoice is late and go straight into your collection strategy. Either way you need to have a method of analysing, which invoices are due when – many accounting software packages incorporate an accounts receivable aging report, which lists your unpaid invoices by age. You should review this report at least once a week and act upon the information where necessary.
Collection strategy.
Where your customer is late in paying up, you will want to encourage him to pay as quickly as possible. It is easier to deal with the situation if you have a standard procedure in place that sets out your collection strategy. A collection strategy may involve telephone reminders, faxes, letters etc. Design your collection strategy to be firm without antagonising customers unduly. E.g. your collection procedure may consist of three standard letters (ranging from concerned to this is the final request), which can be reinforced by telephone calls to the buyer, followed by the involvement of a debt collection agency. The timing of such letters/calls will depend upon the type of customer and size of invoices. E.g. a company with lots of small customers and lots of small invoices may start sending reminder letters within a week of a missed payment date; whilst a company that has a closer relationship with fewer clients and/or larger invoices may use the telephone more and, dependent upon the response, hold back on getting too heavy too quickly.
One way of reassuring yourself that you are doing the right thing if you decide to give a recalcitrant customer more time, is reviewing their credit status with a credit search company. If this comes back with problems you may want to explain your concerns to your client, this way they understand if you are later forced to pass the invoice to a debt collector.
Debt collection
Do not be reluctant to pass the debt to a specialist. Your standard letters will have advised the your customer that this may occur. It should therefore come as no surprise to the customer that the next letter he receives is a letter from a debt collector.
You may be worried about upsetting your customer by passing their invoice to a debt collector – however if you sit on the invoice, you may find that other suppliers to your customer have been firm and are obtaining payment.
Enforce credit limits
It is very tempting to keep selling – even when the customer has stopped paying. You should have set a credit limit for your customer at the beginning of your relationship. The purpose of this is to stop you from exposing yourself too much to any one customer. It would be foolhardy to break these limits without reviewing the customer’s payment records and credit standing first. Think about the impact on your business should the customer file for insolvency…if this would place you in the position of extending your overdraft or seeking other sources of funding, you should be making a hard decision now! Some of the signs that a customer might be getting into difficulty include:
- Cannot contact your customer by telephone and /or they do not return messages
- The signatory(ies) away for longer than 2 weeks
- Premises in disarray, staff constantly changing
- A change of delivery/invoice address
- Rumours in the industry, from your sales staff, other creditors, even your customers’ staff
- Customer becomes unduly difficult and will not accept reasonable resolution of complaints/queries
- Agreed terms are exceeded by more than four weeks
| Don’t become a benevolent bank unless that really is your business. Get your money when it is due to you. |
Disclaimer: The information in this article is for obvious reasons generic in nature. You are advised to seek professional advice before implementing any of the above.
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