Dear Will

Last time in Forecast I focused on cashflow statements and forecasts. Click here if you would like to read the August issue. Managing cashflow leads us to the issue of credit control, so we’ll take a look at this in more detail this time.

With best wishes,

Graham

The Credit Control Balancing Act

Ensuring customers pay bills on time is a serious issue – if they pay you late or not at all, you could have cashflow problems, and could even be forced out of business. It is obviously better for you if customers pay in full in advance. On the other hand, you don’t want to upset them – some customers quite reasonably want to see the product or service up front.

What’s the Risk?

Take steps to assess and manage potential risks well ahead of entering a contract with a customer, and you can make provision for foreseeable issues in the contract itself.

A high risk customer might be one who is new to you, who you don’t know much about or one who will be owing you a lot of money. Low risk clients include Government Agencies, companies with lots of cash, or ones where you have a watertight contract. Try to form a view before you go into the contract. Once the customer has defaulted on payment, or is dragging their feet, it’s already too late in the game.

You can take several steps to encourage customers to pay you promptly, boost your cashflow and reduce the potential for bad debts:

• Request full or part payment in advance, then give your normal credit terms on the outstanding balance. There are cheap and easy ways to do credit checks. Go to Dun & Bradstreet to research your client; they even include a recommended credit limit

• If payment in advance is not possible, request a deposit to meet the initial costs of fulfilling the order

• If a customer will only pay in arrears, offer a discount for paying before the due date

• Make it clear you will charge interest on late payments.

Get your Terms and Conditions Right

Before dealing with any customers, set out clear Terms and Conditions of the contract between you, designed to:

• protect your rights

• limit your potential liabilities

• provide you with some security when selling goods or services.

Never supply goods and services on the basis of informal arrangements; often disputes arise that could have been avoided if clearly written terms had been agreed from the start.

It's important to get your Terms and Conditions right (see the column on the right) - if they're inadequate, it can be difficult to pursue customers or prevent bad debt. Get your solicitor to cast an eye over them.

Get a System!

Get invoices out on time – it’s surprising how many businesses let this slip, thereby threatening their own cashflow! Always address your invoice to a named individual and include your payment terms and a note inviting your contact to raise any queries immediately.

Set up a straightforward system to chase up invoices. Ideally, make a phone call to the named individual to whom you sent the invoice a week or so before the due date, as a courtesy, to ‘let them know’ the date is coming up. Often you will find out this way if there is a problem – maybe the invoice never arrived, or they’ve been out of the country and have forgotten to authorise it.

Call again a week later to remind them the invoice is due, and a week later again, if it’s now overdue. It’s now appropriate to begin a series of letters reminding them of your terms regarding late payment, and that you are entitled to charge them interest (at 8% above base rate) on the debt. Contact me for examples of suitable letters.

If All Else Fails…

Take action sooner rather than later before things have started to slide, but if things go wrong, there are a number of steps open to you, including calling in a debt collection agency, taking your customer to the Small Claims Court, or arranging for them to receive a solicitor’s letter. This last step, the simplest and cheapest at around £40, surprisingly often does the trick!

If things seem to be going badly, I’ll be happy to help. Email me, or call me on 01993 771100 for more advice.