Having an effective credit control mechanism is now more important than ever. A recent study by the Small Firms Association found that over 60% of small firms have had to resort to other forms of finance due to the adverse impact on cash flow caused by late payers. The study also found that invoices issued by small Irish firms are now taking, on average, 66 days to get paid.
Late payment problems aren’t confined to small businesses. Large firms have also seen cash flow problems skyrocket as customers take longer to pay for goods or services supplied, while banks have reduced overdrafts and other working capital support.
“A sale isn’t a sale until the money’s in the bank”. The fact is, while a company may experience an increase in the number of orders placed and invoices issued, unless adequate credit control policies are enforced from the outset, there may be delays in collecting payments or, worse still, much of the sales ledger may end up as bad debt.
Top 10 Credit Control Tips
1. Ensure you have a robust but flexible credit control policy. Agree specific parameters and stick to them.
2. Check credit references thoroughly. It’s not uncommon for a potential debtor to tender “friendly” referees when applying for credit. Take advantage of your network of contacts within the industry and check ALL known suppliers within your trade.
3. Know who you’re dealing with. Make sure you know the correct legal entity of the customer you’re trading with as this will dictate who you will need to pursue if a bad debt arises. If it is a Ltd company, consider asking one or more of the Company Directors to sign a Personal Guarantee, making them personally liable for the company’s debts.
4. Make sure your Terms & Conditions of trade are exhaustive. Include a watertight Retention of Title clause and outline exactly how you will handle queries and disputes. Explain what will happen in the event of a bad debt and whether late payment interest will be charged.
5. Regularly review your sales ledger. Ensure your credit controller has issued all the relevant credit notes and the balances on the ledger are correct. DO NOT put off issuing credit notes as this will only delay the process of cash collection. Conduct a credit control review at least once a month.
6. Regularly review credit limits. Credit limits are not static – they can be reduced as well as increased. If a customer is ordering significantly more than normal, it could suggest that they have been disallowed credit elsewhere because of payment problems.
7. Avoid wearing your sales hat when making credit control decisions. Take a commercial view based on the profitability of the account, the customer’s ability to pay, their reputation and their trading history with your company.
8. Don’t become a free overdraft. Habitual late payers and bad debtors can significantly impact on your cash flow. By not paying your invoices, the debtor may avoid using their own overdraft while placing you in an embarrassing position with your own suppliers.
9. Proactive credit control equals respect. The fact is, most companies only pay when they are asked to do so. If you take an active, professional approach to chasing invoices before the due date, this should ensure your payment is on the next cheque run. If it is not, then you have an opportunity to address any issues that may delay payment.
10. Credit control and debt collection outsourcing. Companies who don’t have the in-house systems, expertise or knowledge to manage their credit control have the option to outsource part or all of their function to specialist 3rd party agencies. Potentially this could free up valuable time and resources while allowing an experienced team to manage the debtors’ ledger on your behalf.
In theory, it’s possible to avoid bad debts altogether However such a zero risk strategy is likely to stifle overall profitability. The aim of any successful business should be to achieve maximum profits by balancing risk and profit. This is what an effective credit control policy should set out to achieve.
As the saying goes – “Turnover is vanity, profit is sanity, but cash flow is reality”.