Businesses today need to focus more than ever on cash flow and late payments. The reality for many companies is that they use your company as the cheapest source of interest-free loans when they are eligible, writes Avinée McNally of the Small Firms Association.
On-time payment is an endless problem for most small businesses. Research conducted by the Small Firms Association1 shows that late payments remain a problem for 95% of small businesses. This leads to significant cash flow problems, forcing corporations to extend overdraft facilities, or to raise additional loans and take up a lot of administrative time. This in turn affects the company’s ability to be competitive, profitable and grow.
Too many small businesses believe that assets in the balance sheet are assets. But until they pay, these figures are worthless scribbles on a sheet of paper.
Credit management policies
It is important to have a proactive credit management policy that establishes the creditworthiness and tracks the type, amount, and due date of the invoices. If no credit is needed, do not give it. Your credit policy should be geared to getting paid on time! Examining the value of credit management is based on its ability not only to reclaim pending accounts, but also to enable the company to maximize total return through trading. While overall responsibility for a particular person / department is within an organization, credit control is everyone’s responsibility and critical to the organization as a whole. When developing the credit policy, the entire organizational framework must be taken into account, ie from sale to collection. Credit management and credit control of a company are an integral part of a company’s financial management system and should be considered at three different levels.
Do you understand your clientele?
If your customer’s customer base is B2B (Business to Business) or B2C (Business to Consumer), you may need different credit policies.
Are personal guarantees for limited liability companies without creditworthiness requested?
How much credit is offered to clients officially or informally?
Which flexibility is used?
Who will be credited? Up to which limit and after which checks?
How are credit limits assessed, controlled and modified?
Who makes the final decisions?
Which methods are used?
How is the system organized?
Is late interest applied?
Evaluate the customer
The caliber of potential and existing customers needs to be analyzed to direct the sales efforts to those who earn the most. Existing customers can be ranked by profitability, business value and financial strength.
The references to these criteria determine whether:
Build the business relationship
Direct efforts to increase sales
Comply with strict credit administration
End the relationship.
Open new accounts
All new business must be subject to a credit check before the sale. New business can be divided into different risk groups (negligible / low risk, medium or high risk) and the terms of payment vary accordingly. It is important to know market trends and solvency risks. This is especially important if you are too dependent on a market that has expansion and deceleration cycles.
The information received directly from the customer must be supplemented by credit information obtained from commercial information companies or credit insurers.
Consider the following information sources to test new customers:
Reports on credit agencies – the most useful but paid source.
Set credit limits
After reviewing the customer and evaluating the evidence, the next step is to set the credit limit if you want to approve the loan approval.
If the review process is long, it may be appropriate
Only grant a starting balance for the first order
Ask for money on delivery
get a deposit
Be prepared to vary the repayment term not just for new clients but also for one-off contracts and selected clients. Consider offering exclusive customers exclusive terms.
Once the conditions are set, they must be met to stay valid. Make sure that your conditions are the only ones, or at least the last agreed conditions. Do not allow shoppers to impose their own terms and conditions.
The capture process
Instructions, regular phone calls, and reminders should be used consistently throughout the collection process, not just when the accounts are considered late.
Do not neglect the possibility to go personally to the customer.
Phone calls should be used at the beginning to create a report. Always talk to the payee, check the payment system and the frequency of checks, record a conversation report, and add follow-up actions to your calendar.
If a final reminder is required, it should be addressed to a senior person, such as the Chief Financial Officer, who is informed that the blame lies with a lawyer or collection agency. Companies that fail to pay their customers damage their credit rating “once it has been passed on to a lawyer,” even if they have not reached the decision-making stage.
Checklist to get paid
Know who owes you and when to pay
Track debts when they are due
Analyze how much you pay too late
Adhere strictly to your credit management policies
Send letters detailing overdue accounts
Call the debtors and ask for payment
Detail of the promises made by debtors over the phone
Remind debtors of broken promises in letters and subsequent appeals
Use a collection agency before the debts get too old.