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 cash flow problems caused by slow-paying customers and bad debt. Unless you implement a clear credit control process, your business’s ability to grow will be under threat.
What is credit control?
Credit control plays a pivotal role in the financial well-being of businesses. Essentially, it refers to the systematic management and oversight of a company’s accounts receivable, ensuring customer invoices are paid promptly. This proactive approach involves monitoring payment timelines, addressing late or delinquent payments, and implementing strategies to optimise cash flow. By maintaining a robust credit control process, businesses can safeguard their financial stability, secure liquidity, and foster sustainable growth. Effectively, credit control acts as a financial compass, steering businesses away from the perils of cash flow problems and empowering them to thrive in a competitive marketplace.
Why is Credit Control so important?
Cash flow is the lifeblood of any business. Without it, a company can’t pay its bills, invest in new products or hire new employees. That’s why credit control is so important – it’s one of the primary ways businesses ensure they have enough cash to run their operations.
Credit control is crucial for businesses to maintain financial stability and ensure steady growth. It involves carefully monitoring and managing the money owed to a company for goods or services that customers haven’t paid for yet. By staying on top of these accounts and taking prompt action when payments are late or missing, businesses can improve their cash flow and avoid financial problems. This proactive approach to credit control helps companies stay financially secure, meet their financial commitments, seize expansion opportunities, and overcome unexpected obstacles.
That’s why we’ve put together these 10 key considerations for improving your overall credit control policies & procedures.
1. Create a clear credit control process
It’s crucial to implement a clear and coordinated procedure for credit control.
Late or delayed payments can put your business at risk of getting into bad debt, and it’s often something that can easily be rectified with a quick nudge or reminder.
With credit control being of such importance, it’s essential that businesses establish a realistic timetable to ensure these payment delays don’t occur.
This timetable should include all the stages that must be completed and adhered to by various team members within your business.
Credit terms are vital; these should be set based on how quickly you need to pay your suppliers. After establishing these terms, you can turn your attention to the stages of 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 payments before they even occur.
2. Research your customers’ credit management
To further streamline your credit control process, an effective way is to do your research on your customers before offering credit.
Very often this credit management tactic is often overlooked, partly because of 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 focusing 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 isn’t 100% a guarantee, the information will allow you to make a more informed decision about the terms and conditions of their particular order.
3. Maintain a positive working relationship
When we think of ‘debt collection’, it can often be negative. But your credit control process needn’t threaten this to your customers.
Building a positive relationship and clear channels of communication with your clients is the best way to ensure an effective credit control process.
One of the best ways of achieving this is by making courtesy calls to confirm receipt of paperwork or before the invoice due date.
This kind of courtesy in your procedure not only helps you to show that your business is friendly and professional, but it also gives your customers plenty of opportunities to explain their situation.
4. Invoice quickly and accurately
The most basic way to improve credit control procedures is by invoicing quickly and accurately.
And some really simple tips make help your business increase the efficiency of this process:
- Send invoices as soon as orders are fulfilled
- Email invoices rather than sending them 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, as this can help solve potential problems early. You’ll also be able to find a reason to contact your customer and build a rapport with them.
5. 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 and accept 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 invoices on time rather than paying all of them late. If this sounds like it might have an effect on your profit margins, these incentives can be incorporated into your pricing structure.
6. Compile a watch list and take action
Due to the problems that occur following the late payment of invoices, you should never just ignore them.
If a specific customer often pays late, it’s important that you monitor this. You could consider adding them to a list of ‘companies to watch’.
This will ensure that you undertake the necessary due diligence when selling to them. For example, for those companies on your watch list, you could decide only to offer credit terms when they pay a deposit.
While customers may have legitimate reasons why invoices haven’t been paid, don’t be afraid of taking action against persistent offenders.
If a particular customer continuously ignores your calls, a simple solicitor’s letter can often spur them into action.
7. 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 a rough outline of the expected revenue coming in and the funds needed to clear any predicted debts.
By having a clear idea of whether the debt will exceed its credit terms, once this has been established, it will be easier to make improvements or take action on existing issues.
Once you have forecasted your cash flow, keep it up to date to ensure there are no surprises in the coming months.
8. Trust your business instinct
It’s common for customers to provide excuses, and we have heard many 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 receive statements from customers that may delay the payment, again, question their reasoning. For example, they may inform you that the invoice will be sent later that day or even later that week. Request a specific time frame, or call them back later to catch up on the delay.
Don’t forget to prioritise the trickier clients; if you have had a track record with customer’s 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.
9. 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 payment methods 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.
10. Keep your terms and conditions clear and consistent
If your terms aren’t clear, mistakes will occur.
Ensure that when you begin working with a new customer, you provide clear and consistent terms. These should outline any or all terms regarding invoice payments to ensure it is made as transparent as possible.
Not only should the terms be clear for existing customers, but they should also provide a basis to follow on your side of the process.
To keep your relationships with your customers amicable, actions must be taken consistently by 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 soon.
Following a number of these steps, or all, will dramatically decrease the percentage of customers who provide late payments. And if you have already followed several of these steps, are you making sure you are expressing the options you provide them as clearly as possible?
Why not make Credit control easier by using technology? There are lots of tools out there that help with Credit Control, from providing you with credit rating information to automating your credit control emails.
Take Satago for example (we are in no way connected or getting the financial reward for mentioning them), for £25 per month you get all of this:
- Credit Control
- Unlimited invoice chasing
- Customisable email templates and schedules
- Risk Insights
- 3 full credit reports
- View customer credit scores
- Credit limit suggestions
- Real-time credit risk notifications
- Access to bad debt protection
- Invoice Finance
- Cash advance on single or multiple invoices
Let technology do the legwork and provide insights for your decisions.
Extra tip: Use unpaid invoices as credit
An effective way to access more working capital is by using invoice finance.
With unpaid invoices, you can improve your cash flow by exchanging them as an alternative to applying for a business loan.
Invoice finance works by releasing money owed to you as outstanding invoices. This working capital will free up money for you to continue running your business while you await supplier payment.
This form of credit control is an effective way of improving your overall daily cash flow management and allows you to be in control of your money without relying on your suppliers.
Invoice finance can also minimise the risk of your physical assets and allow you to receive an advance on payments you are already due.
SMEs and Late Payments
Late payments have a significant and damaging impact on small and medium-sized enterprises , as revealed in the Federation of Small Businesses’ (FSB) report titled “Time is Money: The Case for Late Payment Reform.”
The new report highlights the extensive harm caused by the late payments crisis, with 52% of small businesses experiencing late payments and 25% reporting an increase in such delays in 2022. This issue affects various sectors, including education, construction, administrative, professional, scientific, transportation, IT, arts, and human health and social work. Moreover, the report highlights that small businesses in certain regions, such as the south-east and east of England, and Northern Ireland, are more likely to face late payment challenges.
To address this issue, the FSB has called for a level playing field for smaller firms and emphasises the need for more robust measures to hold larger businesses accountable for their payment practices.
In conjunction with the FSB’s report, the Department for Business and Trade (DBT) is conducting a prompt payment and cash flow review aimed at improving support for small businesses dealing with difficult payment practices. The findings from this review are expected to contribute to the ongoing efforts to address late payment issues.
Additionally, the report highlights that many small businesses resort to seeking credit to manage their cash flow, which is not sustainable in the long run. The public’s expectations regarding prompt payments are also explored, with 62% of the British public mistakenly believing that businesses are paid within a week. This report underscores the urgent need for reforms in late payment practices to alleviate the burden on small businesses and align public perception with the reality of payment timelines.
UK Government: Small Business Finance: The official website of the UK government provides information and resources on various aspects of small business finance, including credit control.
Federation of Small Businesses (FSB): FSB is a leading UK business organisation that offers advice, support, and resources for small businesses. They provide guidance on credit control and other financial matters.
Association of Chartered Certified Accountants (ACCA): ACCA is a global professional accounting body that provides resources and expertise on financial management. They offer valuable insights into credit control practices for businesses. [
Institute of Credit Management (ICM): ICM is the largest professional credit management organisation in the UK. They provide training, qualifications, and resources to support businesses in improving their credit control processes.
British Chambers of Commerce (BCC): BCC is a network of accredited chambers of commerce across the UK, supporting businesses in various areas. They provide guidance on credit control and financial management for businesses of all sizes.
Money Advice Service: Money Advice Service is a free and impartial service that offers advice and tools to help individuals and businesses manage their finances effectively. They provide resources on credit control and debt management.
UK Finance: UK Finance represents the banking and finance industry in the UK. They offer insights, guidance, and best practices for businesses, including credit control and cash flow management.
Chartered Institute of Credit Management (CICM): CICM is the leading professional association for credit management in the UK. They provide training, qualifications, and resources to enhance credit control practices in businesses.
Business Debtline: Business Debtline is a free, confidential helpline providing advice and support to small businesses facing financial difficulties. They offer guidance on credit control, debt management, and dealing with late payments.
This article was written by Peter Stanton
If you’d be interested in receiving a FREE credit control system for your business, please fill in the contact form below:
Please copy and paste the code in your post