It can be easy to neglect managing your debtors when you are busy growing your business. But good credit control is important both to avoid bad debts and maintain a healthy cash flow.
Lowering the risk
Do as much as you can to reduce the likelihood of overdue payments becoming bad debts. This is not always easy, especially if you are just starting your business and every new sale is cause for celebration.
Beware – many small businesses take on large new orders, only to face months of struggle before they get paid.
Get tighter control
Tight credit control is your first line of defense to avoid or limit your exposure to bad debts. Some essential steps:
- Complete thorough credit history and business reference checks before you offer credit to new customers.
- Set reasonable but fair credit limits and tell employees to notify you if a customer wishes to exceed an agreed credit limit.
- Insist that you approve additional credit extensions in advance.
- Include clear payment conditions in your payment terms.
These conditions may seem tough but you’ll find most honest customers don’t mind, and ‘firm but fair’ is a good principle to follow.
- Structure your payment conditions to encourage prompt payment. For example, consider offering a 5% discount for payments made within 30 days.
- Be firm – don’t allow the discount if the payment is late, even if it’s only a day late. You might vary this for good customers as a one-off exception, but make it clear that you’re breaking the rules this one time because you value the relationship.
- Make sure your terms and conditions specify if and when you will start to charge interest on overdue amounts. This can be difficult to enforce and can leave customers with a negative impression – they may feel they’ve had to pay more to deal with you, even if it is their own fault for paying late. Check with your accountant or lawyer to see if there are any legal limits to the interest rate you can charge.
- Ensure customers sign acceptance of your terms and conditions as this can eliminate future disputes.
- Implement the terms and conditions first for new customers and for customers wishing to extend their credit limit. You may find it more difficult to introduce the terms to existing customers, especially those who have been loyal in the past or who you know personally and don’t wish to upset.
You’re more likely to be paid promptly if you include full payment details on invoices and statements.
- Give your billing address and bank account details and offer more than one payment option such as check, credit card, or online payment.
- Show clearly the amount owed and when payment is due.
- Include any applicable discounts to encourage prompt payment.
- Give details of interest charges that will be applied to discourage late payment.
"Tight credit control is your first line of defense to avoid or limit your exposure to bad debts."
Provide the right information
Remember to include any extra details that a customer might need to pay you such as the order number or contract number, details of who placed the order, and an account number. Leaving these details out could delay payment.
If necessary, contact the customer before billing to check exactly what information they need to expedite payment.
Prevention is easier than collection
Good systems are a problem-prevention tool:
- Bill promptly, as soon as the job is completed. There’s no reason to wait until the end of the month. Late invoices often get paid late. Prompt invoicing means you’re less likely to miss the next payment cycle, particularly with larger corporations.
- Keep an up-to-date record of what each customer owes you. Most accounting programs enable you to flag overdue payments and any customers approaching their credit limit.
- Watch out for sudden increases in order values. A customer may build a good credit record with you by paying a series of smaller orders on time, followed by a much larger order. This deserves investigation and possibly another credit check before you approve the order.
- Follow up overdue accounts immediately to uncover the problem. You don’t want to appear desperate, but small invoices can often be missed, especially by a large business.
- Call a few days after the payment is due. Depending on who it is and the amount, this could be the day after it’s due or within seven days.
Once customers know you will always make contact if payment is late, you’re more likely to get priority when they schedule payments.
Many ‘pay the ones that make the most noise’. Within reason, make sure this is you.
Stick to your payment terms
Stop supplying customers who haven’t paid accounts on time. You can use the fact they need your goods or services as leverage to get paid promptly. This might cost you some business, but it will also reduce the risk of being exposed to bad debt.
Similarly, stop supplying goods to customers in excess of their credit limit until you have reassessed their creditworthiness.
- Revise and tighten your debtor management. Develop clear policies and procedures for debt monitoring and collection that suit your business.
- Draw up new or more suitable payment terms, checked by your accountant and lawyer.
- Require customers to sign acceptance of your terms and conditions before giving credit.
- Stop further orders from customers exceeding credit limits until you have reassessed their creditworthiness.
- Apply your procedures promptly and consistently.
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