Credit Control - Getting paid
Half of all new businesses fail during the first two years. All too
often the cause of failure is not the quality of the product or service, the
effort and talents of the people, or the sales and marketing. It is quite simply
financial failure - running out of money - which leads to closure, if not bankruptcy.
In many cases, this failure could have been avoided by simple but effective
planning from the outset. In too many new businesses well-qualified people
enthusiastically develop their goods or services but pay insufficient attention
to cashflow. Late payment erodes profits and stifles growth. A sale is not
really made until it has been paid for.
The discipline of ensuring prompt payment is called credit control or credit
management and it has to be a priority if a business is to succeed.
Granting credit to a customer involves the risk of non-payment and so should
only be done after checking and assessing that risk. A bad debt means that
a company could have to make sales five - or even ten – times the value
of that bad debt just to recoup the loss. Research shows that the longer a
trade debt remains unpaid the greater the risk that it will never be paid.
For many companies, their receivables, the money owed to them by their customers,
are their largest assets. Figures from BACS - the banks' automated clearing
system - show that growth businesses have a combined overdraft of £4bn.
Reducing the amount owed by debtors reduces the overdraft and frees up capital
to be used to finance the business, and reduces the stress of running the business.
Credit Control - The basics
Making sure you are paid should start even before you have made your
first sale. You could take some basic training. Your local chamber of commerce
will run training schemes in basic credit control, including such topics as
how to collect a debt over the phone. These courses are open to non-members.
The Government sponsored, Better Payment Practice Group (BPPG) was formed
to reduce late payment of commercial debt and publishes advice on the subject.
From the outset, establish procedures for credit applications by customers:
Produce a credit application form: books or advisors will show you how
Make credit terms very clear
Ensure that all staff are aware of credit policy
Make payment terms a condition of sale
Make sure that any buyer signs agreeing to your credit terms.
Then decide that you will receive prompt payment;
Design a clear invoice which will always state agreed payment terms
Decide from the outset that you will always send invoices promptly and keep
Establish a timetable for chasing debts, starting with the first request for
payment – the invoice.
Payment should never be an afterthought. This way you will have established
it as a priority and can give customers credit where appropriate.
It is important to establish a potential customer's credentials. A visit to
their premises will usually tell you a lot. The Annual Report is useful, although
the information could be out of date. For high value or high risk orders, obtain
a report from a credit reference agency. Such reports cost between £3
and £25, depending on the level of information.
If you have a new customer, confirm that customer exists at where it says
it exists. Confirm the address to avoid fraud. See how long they've been trading.
If they're on a short lease, they could disappear with the goods. Also confirm
that they have the cash to pay. There's no need to check their profit and loss
account yourself because a credit reference company will do it for you – and
they will suggest a credit limit and a credit rating.
For potentially high value orders, take a credit report prior to negotiation,
to avoid wasted effort. Credit costs and knowing the risks in advance helps
in pricing. Remember, credit control is a continuous process: always monitor
your debtors; their circumstances may change.