10 key considerations to improve your credit control process

 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.

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 the process of monitoring and managing a company’s accounts receivable – that is, the invoices it has issued to customers but hasn’t yet been paid for. By closely monitoring these accounts and taking action when payments are late or delinquent, businesses can improve their cash flow and avoid financial problems.

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 need to 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 then turn your attention to the stages involved in chasing payments.

For example, your process may consist of the following:

1.     Establish the importance of prompt payment of invoices by politely reminding customers of the payment schedule when the order is fulfilled

2.     Send reminder letters on the day the invoice becomes overdue

3.     Send subsequent letters every 7 days if the invoice remains overdue

4.     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.

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 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 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 very often be negatively. 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 in advance of 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 your credit control procedures is by invoicing quickly and accurately.

And there are some really simple tips that 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 to solve potential problems at an early stage. You’ll also be able to find a reason to make contact with 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, 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 invoices 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.

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 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 to why invoices haven’t been paid, don’t be afraid of taking action against persistent offenders.

If a particular customer is continuously ignoring 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 as well as the funds needed to clear any predicted debts.

By having a clear idea on whether the debt is going to exceed its credit terms, 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 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 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 time frame, 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.

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 methods of payment you could offer them.

You could offer the following:

·         Cheques

·         BACS

·         Credit/debit card

·         Cash

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 them with 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.

In order to keep your relationships with your customers amicable, actions need to be taken in a consistent method 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 in due course.

Following a number of these steps, or all of them will dramatically decrease the percentage of customers who provide late payments. 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.

Utilise Technology

Why not make Credit control easier by using technology. There are lots of tools out there that help with Credit Control, from providing you 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

·         Mailbox

·         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 the 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 in the form of outstanding invoices. This working capital will therefore free up money for you to continue running your business whilst 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 will allow you to receive an advance on payments you are already due to receive.

With so many methods for ensuring effective credit control, why not put these points into practice?

If you’d like to speak to a member of our team about the range of invoice financing options we have available at Peak Cashflow, please get in touch with us by clicking here.