The Money-Go-Round (Credit Control)

We have previously discussed the problems that so many businesses encounter – poor cash flow and the effect that can have on the workings of your bank account. Good credit control can often be the key to avoiding this situation.

With good credit control the key is systems. A good system will lead to efficient credit tracking. If this is then added to a firm, but subtle and understanding approach you have the sound foundations for an effective credit control system.

The problems which many of the businesses who I encounter are that the owners (managers) have an inbuilt dislike of systems. I use the term dislike deliberately as they will usually confess that they see why systems are necessary and then cite the fact that they are too busy to implement one. Perversely, this avoidance of systems is often costing the business greatly – both in direct cash and also time (and therefore indirect cash)!

Poor credit control can, and often does lead to the failure of otherwise successful businesses. Don’t let yourself be used as a source of free working capital. The credit terms which your business offers must work for YOU as well as your customers.

However, don’t forget that if you are too hard on your customers they may become reluctant to place orders with you and go elsewhere instead – a supplier who will give better terms – so insisting on receiving payment with the order is not always the best course of action!

Find the happy medium.

When you take on a new customer, do you investigate them in respect of their credit history if they ask for an account with you? It may not be your policy if they are only purchasing a relatively small amount from you, and mostly new customers are trust worthy. However, some people abuse your trust and as a result end up owing you money! Perhaps, as has happened in the past to me, claiming that you were supplying your service to them for free – how many businesses are in the habit of supplying a service or goods to another for free so that that business can make a profit leaving you out of pocket? Not many! The moral of the story? Check out new customers carefully, even if they are recommended to you by highly trusted friends and colleagues – sometimes those friends have been fooled as well.

How can you check out new customers? Take up references from their other suppliers. Although you may fee that this is a little over the top, it is a fast and effective way of finding out if someone is genuine. If they are not a new business and they have no credit accounts with any one else why not? If they are genuine there will be a valid and justifiable reason for this, and they will be happy to explain.

If you meet with resistance at the idea of taking up a reference ask yourself why. This reluctance may well be because they are covering up a problem in their past that they would rather you don’t find out about.

If the new customer is a limited company it is possible to obtain a copy of the latest set of accounts filed by them from Companies House. However, although these can be used to highlight the creditor payment days that the business employs, the accounts filed are historic and may not be a true reflection of the trading situation of the company today.

Another effective way of tracking a new customers credit worthiness is to go to a credit reference agency and pay for a check to be made. These agencies can be found relatively easily in your local phone directory.

Obviously, you have to take the final decision on whether or not it is worth investigating a customer’s creditworthiness. Perhaps it may not be worth it for a small initial order, but as the size of orders grows… reassess your position in this area.

What about those accounts that become overdue? How can they be avoided, and if not avoided what can you do to ease the payment?

To avoid overdue accounts some businesses levy a credit charge of all accounts which are not paid with in the required time period – often between 2% and 5%. Or, alternatively offer a discount to those who pay within a given time period (usually a period significantly shorter than the full credit period. Often these are enough to encourage the majority of people and businesses to pay up in time. However, it is not always the case.

When the credit period is overdue you have a range of actions which you can and should take.

  1. Send out a polite letter with a statement of account to the client, and follow it up with a polite telephone call a few days later if you have no response.
  2. If payment is still not forthcoming follow up with a firmer letter requesting immediate payment, and another copy of the statement of their account. Ideally you should send this by recorded delivery thus removing any possibility of the customer claiming that they never received it. At the same time stop any further supplies (I never cease to be amazed by the number of businesses who continue to supply people and businesses who are already causing credit management problems!).
  3. If a customer is persistent in their non-payment, but always pays up eventually either remove their credit facilities or charge extra to cover your additional cost and efforts (they may not like it but ask yourself if you really need to do regular business with this type of customer).
  4. If you have a large number of invoices you may consider that the best form of credit management is to get a third party to do it for you. This can be done by factoring invoices. By entering into this arrangement the third party takes over the onus of the collection of payments in return for a fee. Whilst this can be an effective way of managing your invoice payment collection, ensuring you a more consistent cash flow, it does cost, and you should ideally aim to use it for a short-term solution until your own system is in place.
  5. The ultimate resort is to take the bad payer to court. This can be achieved relatively easily and without huge cost by going through the small claims court.

Good credit control is all about trying to prevent problems occurring as prevention is easier than the cure.

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