Every year, start-ups and small businesses in the UK fail because they run out of cash. One of the main reasons for this is cashflow problems caused by slow-paying customers and bad debt. Unless you implement a clear credit control process, your business’ ability to grow will be under threat. That’s why we’ve put together these 6 key considerations for improving your overall credit control procedures.
Create a clear credit control process
It’s crucial to implement a clear and co-ordinated procedure for credit control. Initially, you need to establish a realistic timetable, including all the stages that need to be completed and adhered to by various team members within your business. Credit terms should be set based upon how quickly you need to pay your suppliers. After establishing these terms, turn your attention to the stages involved in chasing payments. For example, your process may consist of the following:
- Establish the importance of prompt payment of invoices by politely reminding customers of the payment schedule when the order is fulfilled
- Send reminder letters on the day the invoice becomes overdue
- Send subsequent letters every 7 days if the invoice remains overdue
- After a specific period of time, it might be useful to pass the debt over to a reliable, commercial debt collection agency
Simply recording this process ensures that all the relevant parties are aware of the terms and conditions and, in addition, will help to reduce the problems associated with late payment before they even occur.
Research your customers
A further consideration in streamlining your credit control process is researching your customers before offering credit. Yet this credit management tactic is often overlooked. This is partly due to the costs of producing credit reports. However, some of these costs can be offset by establishing which of your clients pose the greatest risk and focus your attention on researching these.
Once you’ve obtained all the necessary business information – such as full trading name, registration number, addresses, and key contact details – you can easily check credit risk through a variety of online services. Examining these reports can help you decide if that particular customer is safe to do business with. While credit checking prospects won’t guarantee payment, the valuable information it will give you will allow you to make a more informed decision about the terms and conditions of their order.
Maintain a positive relationship
Your credit control process needn’t be threatening your customers with debt collection. Building a positive relationship and clear channels of communication with your clients is just as important. One of the best ways of achieving this is by making courtesy calls to confirm receipt of paperwork or in advance of the invoice due date. This kind of courtesy not only helps you to show that your business is friendly and professional, it also gives your customer plenty of opportunities to explain their situation.
Invoice quickly and accurately
The most basic way to improve your credit control procedures is by invoicing quickly and accurately. And there are some really simple tips that make help your business to increase the efficiency of this process:
- Send invoices as soon as orders are fulfilled
- Email invoices rather than sending by post
- Ensure that the invoice is addressed to the right person
- Make sure that there are no mistakes in the invoices
After invoices have been sent, it’s worth confirming that the invoice has been received. This can help to solve potential problems at an early stage, as well as giving you the chance to build a rapport with your customer.
Encourage early payment
At the most obvious level, early payment can be encouraged by making sure that it is as easy as possible for invoices to be paid. Ensure, for example, that all your banking details are clearly stated on all invoices, as well as accepting different forms of payment – particularly online payments.
Incentivising payment is a further way of encouraging early payments. In terms of incentives, you could offer early settlement discounts for those risky customers if they pay within the stated credit terms. It can also sometimes be beneficial if certain customers pay the majority of their invoice on time, rather than paying all of it late. If this sounds like it might have an effect on your profit margins, these incentives can be incorporated into your pricing structure.
Compile a watch list and take action
Due to the problems that late payment of invoices can give rise to, you should never just ignore it.
If a specific customer often pays late, you can add them to a list of companies to watch. This will ensure that you undertake the necessary due diligence when selling to them in the future. For example, for those companies on your watch list, you could decide to only offer credit terms when they pay a deposit.
While customers may have legitimate reasons as for why invoices haven’t been paid, don’t be afraid of taking action for persistent offenders. If a particular customer is continuously ignoring your calls, a simple solicitor’s letter can often spur them into action.
Forecast your cash flow and keep it up to date
It’s important to remember that forecasting is never a fully reliable source of information, however it will provide you with rough outline of the expected revenue coming in as well as the funds needed to clear any predicted debts.
It’s best to have a clear idea on whether debt is going to exceed its credit terms, and once this has been established it will be easier to make improvements or take action on already existing issues.
Once you have forecasted your cash flow, keep it up to date to insure there are no surprises in the coming months.
Trust your gut
It’s common for customers to provide excuses, and we have heard a lot of them. Clearly excuses cannot be discredited, but it’s within your rights to question their reasoning and ask them to provide documentation if possible.
If you are receiving statements from customers that may be delaying the payment, again, question their reasoning. They may, for example, be informing you that the invoice will be sent later that day, or even later that week. Request a specific timeframe, or even call them back at a later time to chase up the delay.
Don’t forget to prioritise the trickier clients, if you have had a track record with a customers invoices being late, or requesting to bide time on more than one occasion, it’s in your best interest to keep them on your radar, even if they are currently on time with their invoices.
Make it easier to get paid
It’s easy for a customer to give the “the cheque is in the post” excuse, and the best way to combat this is by researching alternate methods of payment you could offer them.
You could offer the following:
- Credit/debit card
This can give the customer options, and will greatly increase the percentage of invoices paid on time.
Keep your terms and conditions clear and consistent
If your terms aren’t clear, mistakes will occur. Ensure that when you start a relationship with a new customers you provide them with clear and consistent terms, and outline any or all terms regarding invoice payments to insure it is made as transparent as possible.
Not only should the terms be clear for existing customers, but followed correctly on your side of the process. In order to keep your relationships with your customers amicable, actions need to be taking in a consistent method from both parties.
Ensure that your terms clearly state your tolerance policies on late payments and the action that can be taken if a late payment issue occurs.
As long as you are honest and work with your customers, the more unreliable customers will come to light in due course. Following a number of these steps, or all of them will dramatically decrease the percentage of customers who provide late payment. And if you already followed a number of these steps, are you make sure you are expressing the options you provide them as clearly as you possibly can.
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