 | Effective credit control is not just about avoiding bad debts and collecting your cash. It’s also about knowing the difference between a customer who wants to pay but cannot and one that just does not want to and taking the appropriate action at the right time.
Someone who knows credit control will also be able to help you manage your risk appetite and help you sell more when you need to; not all bad debts are bad! Selling 10 items on credit at £100 and being paid for 5 is better than only selling 3 items at £125 cash up front.
Like everything else, it takes time to perfect the process and is forever evolving, the tips simple tips included here should get you on your way.
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Prior to any business engagement ensure you know who you are entering into business with.
Collect the following information:
Name, Address & Registration number.
Make the process more formal with a credit application document that also includes some basic terms and conditions (payment terms) and requires a signature.
Before doing any business on credit assess the risk of your potential customer. Pull a credit report from a credit agency and balance that with any other date at your disposal such as information from other suppliers.
If you have any doubts ask for further financial information or insist upon cash in advance.
If you want to be paid on time your customers need to know when and how you expect to be paid. Make sure your payment terms AND the due date is included on your invoice. DO NOT just say payment is due in 30 days, state the date.
If you expect payment by bank transfer include your bank details on the invoice.
Note: If you receive a purchase order from your customers, ensure the payment terms match your own. If not, deal with it before you do any work or send any product.
You have sent the goods or completed the agreed service, NOW is the time to get your invoice out the door. Do not wait until the end of the week or until Bill returns from the shops with lunch, the earlier you invoice the earlier you get paid.
Wait, have you double checked the invoice? Is it 100% correct and complete as per your contract.
If you get anything wrong here, your customer will have an excuse to delay payment.
A few days after sending the invoice (around 7 if your terms are 30 days) give your customer a courtesy call. Ensure they have received your invoice and that it has been checked and approved by the appropriate person.
This call also gives you a good chance to re-affirm the good nature of the transaction to date and show them that you are a customer service friendly supplier, ideal for feedback forms or satisfaction surveys at a later date.
Don’t confuse assertiveness with aggression.
Don’t let your customers take you as a soft touch. Once your invoice reaches the due date contact them and insist upon payment.
Don’t accept excuses at face value. Ask direct questions such as “Why have you not been able to pay to the agreed terms”
Most people are honest, and DO want to pay you. Sometimes they have issues which delays things. Learn the difference between those that want and those that don’t want to pay you and apply the appropriate pressure and you will not go far wrong in your approach.
If you are extending credit you need to have an understanding of the appropriate rules and regulations. These include the following:
The Late Payment of Commercial Debt (Interest) Act 1998, as amended in 2002.
County Court Process for Judgements.
Enforcement methods such as a Warrant of Execution, Third Party Debt order, Attachment of Earnings or Charging Order.
Or even using a third party mediator if a dispute arises.
Tips 1-7 guide you through a transaction. Tip 8-9 are all about controlling the whole process:
Write a clear Credit Policy. This policy will detail how you credit assess new customers, who in your company has approval for granting or increasing credit lines to customers, your terms of sale (payment terms) and who can override them and a general outline of your collections process.
When you are just starting out it may seem overkill, but it is a live document and having it in place now will prevent issues coming up as your company grows.
As your company grows and you employee more people ensure that EVERYONE knows about your credit policy and understands it.
You have standard payment terms for a reason. Joe, your new sales executive may not know this and could make a promise that you cannot or should not keep.
This important document should become part of your new employee induction package.
It’s easy to pick up the phone and ask for something that is rightfully yours, isn’t it?
Not everyone feels comfortable being assertive when it comes to asking for cash and your customers know that and they will exploit it given the chance.
If you cannot do it yourself or cannot afford to hire someone to do it for you then outsource the work, pure and simple. Like every other business function there are people out there who you can partner with to ensure the job gets done to your satisfaction.
Conclusion
If you do not make any sales you would cease to trade, everyone understands that concept, However, many people tend to forget the age old adage “a sale is not a sale until payment is received”
Do not neglect the importance of having a sound policy for credit granting and a flexible collections process. On average UK businesses pay each other 20 days past due. Know what is acceptable for you and work with it.
A good credit policy will eliminate the obvious bad debts and a flexible collections process will mop up the rest, leaving you to concentrate on building your business.
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TAGS:
Credit Control,
Payment Terms,
Invoicing,
Invoice