In these difficult financial times, many businesses are struggling with cash flow problems, at worst resulting in them folding all together. Let’s look at the basic principles that always apply to effective credit control.

Why you need credit control

The main purpose of setting up an efficient credit control system is to achieve a balance between ensuring that your business receives payments in a timely manner and keeping your customers happy.

If you’re setting up a new credit control system or are seeking to improve an existing one, there are many factors to consider.

Make someone responsible for credit control

Firstly, appoint a single member of staff or small team to be responsible for credit control. This ensures that such matters will be handled promptly and efficiently, rather than being pushed aside while other day-to-day business needs are taken care of.

Credit check new customers

Then, put procedures in place for new customers. You should credit check all new customers as a matter of course to minimise risk. It is also prudent to set low credit limits when first beginning a relationship with a client. You can always increase these later, once the client has proved their value and trustworthiness.

Put payment terms in writing

Set out your payment terms in writing and make sure that all customers are aware of them.

Thirty days is an accepted standard for payment of credit, but you may wish to adjust this to suit the needs and cash flow of your business. In addition, make clear to customers any interest or late fees that will be charged for late payments.

Send invoices out promptly

Be sure to send out invoices promptly, either on a particular day of the month or within a defined timeframe after the provision of services or products. When shipping products, it is always best to send the invoice at the same time if you haven’t taken advance payment.

Send out reminders

Have a system for sending out reminders prior to the invoice due date, particularly in the case of large payments.

Chase unpaid invoices

Put procedures in place for dealing with invoices that have passed the due date and ensure that there is a person within your company who has the clear responsibility of chasing up unpaid invoices.

Offer multiple payment methods

Allow a certain amount of flexibility on payment methods. Part of ensuring that you get paid on time is making it easy for your customers to pay you. The more methods of payment you accept, the easier it is for your customers to pay you on time.

Debt collection as last resort

It may be tempting but use debt collection agencies and legal action as last resorts. Once again, it’s important to strike a balance between ensuring that you get paid and keeping your customers happy.

If the client has a genuine reason for not making the payment, it may be possible to reach an agreement without the need for drastic action that could result in the termination of the relationship.

Having said that, if a particular customer is always defaulting on the money they owe, and you’re spending more time chasing them than their business is really worth, it could be better to cut your losses and cease doing business with them.

Keep a list of bad payers

Keep a list of non-paying customers and ensure that all staff are aware of it so that further products and services are withheld until payment has been received.

Consider whether it is worth taking out credit insurance to protect your business from the worst risks of bad debt.

How to minimise bad debt during the pandemic

There is no doubt that the advent of COVID-19 has increased the risks of bad debt for almost all businesses. Its effects may cause your customers to:

• Experience cash flow or liquidity problems
• Delay or default on payments to you
• Suffer delays or defaults on payments by their own customers
• Shut down their businesses
• File for bankruptcy

Such outcomes could have a crippling effect on your own business’s cash flow. However, there are four steps you can take to optimise accounts receivable:

1. Use analytics to assess and categorise your accounts receivable portfolio, so that you can tailor your collections strategies to the accounts that need them most.
2. Consider renegotiating payment terms with customers carrying payment risk. As long as the renegotiated terms align with your company’s credit policy, this will often give you more chance of collections. The key is to be diplomatic while insisting on settlement terms.
3. Streamline your accounts receivable process. Issues that are minor hiccups in normal times can become magnified in coronavirus times. Ironing them out will help you save precious time and working capital.
4. Adjust collections operations to the availability of your workforce. The effects of the pandemic may mean that your collections staff can conduct only part of their collections activities or may even have to suspend them all. In such circumstances, you may need to consider establishing a strategic partnership with a collections agency.

Judicious use of the above measures will help you limit bad debt losses as much as possible.

Terry Irwin is CEO and head of the UK office of TCii Strategic and Management Consultants

Further reading

What is invoice finance and who are the top 5 lenders?