Blood from a stone – Credit Management Strategies that work

Debt is a perennial problem for businesses in the UK and many find their cash flow crippled by unpaid invoices. Oliver Haill investigates the choice of credit management strategies companies can take.

It would be unfeasible to run any enterprise of scale without extending and accepting credit. Trade credit is actually a crucial source of funding for companies and is on average ‘twice the size’ of bank credit, according to the Credit Management Research Centre (CMRC). As trade credit is a two-way transaction – where companies use trade credit as customers, via accounts payable, and provide it as suppliers, through accounts receivable – it is a significant part of corporate liabilities and assets. In fact, in the UK corporate sector the CMRC calculates that more than 80 per cent of daily business-to-business transactions are on credit terms and that trade debtors are ‘usually the main (and riskiest) asset on most corporate balance sheets, representing around 30 to 35 per cent of total assets, on average, for all companies’.

UK businesses take an average of 54 days to pay their bills, reckons credit management specialist Intrum Justicia, adding that about 44 per cent of accounts receivable of the companies registered in this country are overdue, equivalent to more than £30 billion. Findings from PricewaterhouseCoopers (PwC) indicate nearly one in five companies regard current debt levels as the ‘biggest threat’ to survival.

In the UK, the Late Payment of Commercial Debts Act in 2002 was introduced to help assuage the problem. This enabled small businesses to charge interest at eight per cent above the existing base rate on debts due from large businesses, public sector bodies and other small businesses, and to claim a contribution towards the cost of a collection agent’s fees. However, SMEs typically feel they may lose business by charging their larger customers interest.

Credit Management Strategies

So, what to do if your cash flow has been reduced to a dusty dribble because your debtors aren’t stumping up the cash? Firstly, stop the rot, chiefly by getting a good grip on your credit management. When Michael Wilmshurst became chief executive of Nationwide Accident Repair after a hostile takeover in 2002, he soon realised credit control was not part of company culture. ‘It appeared that we were just lending our customers large sums of money and it would’ve been a lot more useful to us in our bank account instead.’

In fact, the company had debts running over 120 days amounting to £1.6 million. But Wilmshurt’s commitment to reducing this figure means it now stands at just £115,000 – how did he do it? ‘The first action taken was making sure we were invoicing the right amount, not just sending out invoices and making corrections after, which adds to the time it takes.’

Research from PwC has found that around 85 per cent of the reasons for non-payment are due to invoice queries or poor administration. Wilmshurt’s second pillar of credit control is to make sure the invoice is being sent to the right place. ‘You wouldn’t believe how many times invoices are sent to the wrong address, especially when dealing with large firms. When you’re dealing with a multi-site businesses you need to make sure you’ve got the right one for each invoice.’

The next practice Wilmshurt installed was a ‘structured process’ for the debt chasing procedure, including making follow-up phone calls after certain periods of time and re-sending of invoices after another interval had passed. He established a weekly review to see what was due in 30 days, in 60 days, and so on. ‘It wasn’t too complicated – the figures for all our sites fitted on one sheet of A4 paper.’

Chasing debt – Get back to basics

Julian Roberts, director of PwC’s receivables management group, urges businesses with recurring credit problems to ‘get back to basics’.

‘At the most basic level, you need to have people who are actively involved in chasing debt, rather than just doing it on Saturday morning as a number of business owners do.

‘It all comes down, at a very early stage, to knowing your customers,’ he believes. ‘It can be useful before you do business to do some “sounding out” about a potential customer’s credit-worthiness – even if it’s just “He’s a good chap” from someone whose opinion you trust. And your sales team is a very important part of that – they go into the offices of your clients and can see if the company is well organised.’

Aside from that, there are numerous agencies that provide reports on how quickly potential customers pay their bills, and, if they’re listed, you can find out for free on

Get a good financial controller

It’s vital to have a good credit controller, stresses Roberts. ‘They should have monthly cash collection and overdue-debt targets; better still, they should be incentivised to meet them.’

Or go further, counters Wilmshurst, outlining the most important change he made at Nationwide – incentivise management to take responsibility. ‘We linked debt to managers’ rewards. If there was a £1,000 debt that passed 90 days that would cost the manager £100. Suddenly all the managers found a way to get their money. Management of credit needs to be part of managers’ jobs, not just something they blame on the finance department.’

Warming to his back-to-basics theme, PwC’s Roberts mentions more principles that credit departments should adhere to: getting the bill out at least the day after the delivery has gone out; checking the ledger every day and not waiting until invoices are overdue before chasing them; and perhaps putting credit limits in place for each customer. But avoid standard collection letters: ‘They’re thought of as a bit of a joke and are generally useless,’ he warns.

The right deal

When signing deals, it is imperative that sales staff ensure contracts contain your terms and conditions, or at least decide whose terms and conditions apply and whose jurisdiction it is if you’re dealing across international borders. Jane Dunlop, partner and debt recovery specialist at law firm Clarke Wilmott, has seen businesses make purchasing deals verbally or on the back of the proverbial fag packet. She stresses that ‘if a contract’s straightforward and there are terms and conditions that have been adhered to, the money has to be paid.’

Dunlop observes that, of the many County Court actions in which she’s been involved, ‘there are invariably cases where the company hasn’t chased the money, the work hasn’t been done, or someone else has chased them harder. Sometimes the invoice and the chasing haven’t been directed to the right person. I’ve even had to send bailiffs to Tesco’s before – clearly a company that can pay – but the supplier wasn’t getting through to the right person.’

Time for the baseball bat?

So, when is it appropriate to call in outside muscle? Mark Boughton, CFO of technology services provider Venue Solutions, says he’s only had to do it once at a previous post. ‘It was a decision taken after six or seven months of haggling with the company, getting promises made just to keep us quiet. I felt it was appropriate in this case and the debt collection agency used strong-arm tactics and just camped in their lobby, refusing to leave until they got a cheque. I prefer to meet with the FD and work something out with them – everyone can have credit problems at some point.

‘Another time, many years ago, one large customer of the company I was working for was growing very fast and we were concerned about their ability to pay. We worked out how much of our stock they needed and limited the amount we sold them, so that they paid off what they owed before we supplied them any more. I would go to their office each time and made sure I came out with a cheque. We also had an agreement with them that if they did go belly up we would be able to come into their warehouses and get our stock back. We had to cover ourselves, but at the same time we worked it out amicably with them and it maintained the working relationship.’

When it comes to keeping up a relationship with a recalcitrant debtor, PwC’s Roberts urges you not to throw good money after bad: ‘If they’re a good purchaser but a bad payer you have to think about whether you want to continue dealing with them.’

Calling in a Collection Agency

Apart from situations when the occasional bloody-minded customer seems unwilling to pay their bills, a collection agency is also advisable if you are dealing across borders. There may be many cultural differences as well as the obvious difficulties of language barriers. Another instance where it might make sense is if you have a large number of customers who represent a small value of debt. Lots of work for less reward means it makes sense to use a debt collection agency. Although they may have a mixed reputation, figures from trade body the Credit Services Association (CSA) indicate that its members recover up to £5 billion each year. Fees charged by debt collection agencies vary, around ten per cent of the amount recovered being common – and some agencies offer flat rates. Make sure you’re using a reputable firm, registered with the CSA.

Owen James is director of Intrum Justicia, a Scandinavian company offering debt recovery as one of its services. He says that companies such as his can crunch through large numbers of calls with great results, and that the industry is losing its old reputation as being harmful for clients’ reputations. ‘We’re very tightly regulated and it’s becoming more acceptable in Europe to pursue customers for overdue debt.’

Such agencies can reach the parts normal credit controllers cannot reach. ‘We’re trained to negotiate and can deal with industries like catering and entertainment, where, if you call during normal office hours they won’t be there.’

James is even humble enough to suggest how businesses might be able to circumvent the use of a collection agency. ‘It can make an overnight difference if you link sales remuneration to actual payment of invoices, rather than having bonuses paid based just on billed revenue.’

Court order?

If you’ve exhausted all means of reaching a settlement and are stuck in a dispute with your customer, it may be time to take recourse to your solicitor or the small claims court. The courts are gridlocked with commercial disputes as more and more people take this option, but there’s time and money involved. If you’ve got a debt, the likelihood of a trade supplier being paid in an insolvency situation is remote. Court should certainly be a last-ditch option.

Unsurprisingly, Clarke Wilmott’s Dunlop advises contacting a solicitor to see if it’s worthwhile making a claim. ‘It depends if it’s cost-effective for you not to – maybe your customer won’t be able to pay up. An effective tool to put pressure on an obstinate debtor can be a solicitor’s letter. Just having a solicitor’s letterhead can make a difference.’

The next stage, if neither contacting the company nor a solicitor’s letter has had any effect, should be a county court claim. ‘The point of small claims is that people can do it themselves rather than use a solicitor, but medium-sized business generally want to employ professionals,’ says Dunlop. ‘Using a solicitor is usually better than having time away from your daily work.

’I’d say 80 to 90 per cent of debt recovery goes through the courts. Once a judgment is obtained, the difficult bit is getting the money. Usually a warrant is issued or you can take a third party debt order, where you get money that is owed to the debtor. Otherwise bailiffs can arrange installments, can force entry to business premises and can take goods to the value of the debt.’

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