Monday, 21 February 2011

Small Business Advice Part Five - The Importance Of Credit Control

Many people who are new to business concentrate all their efforts on sales. After all, without any sales there is no business. But, in their unquenchable thirst for selling, many overlook the collection of the money that all those sales have created. If you are in a pub, a shop or any business that is paid immediately you can stop reading now as this blog is intended solely for those who offer credit to their customers.

In simple terms credit control is just good housekeeping. If you are owed say £20,000 and it is all due to be paid to you on 1st March that means that, all being well, your bank account will swell by £20,000 on that date and you will be able to pay your own bills. But what if it doesn't all arrive on time? If £10,000 is late, that's £10,000 less in your bank and I don't need to explain the effect that could have on your business. You are in business to sell stuff and not to provide overdraft facilities for your clients.

So how do you operate good credit control? Well, a good starting point is to make sure that you don't give credit to customers that can't demonstrate that they have the means to pay. You can check up on them by investing in a subscription to a good credit agency (we used to use Agencies like this will let you look up the basic details of the customer and have a look at their balance sheets and their suggested credit limit. Make sure that the customer completes and signs an account opening request agreeing to your terms and conditions (check the Internet for example trading terms and edit them to fit what suits you best). When you are happy, set them a realistic credit limit in line with the business you expect.

When you are establishing your terms and conditions try and fit in with the norm for your market. If you are being given thirty days by your suppliers it is reasonable to offer the same. If you offer much longer than you are given, you may well find yourself having to pay for several months worth of supplies before your receipts start to flow.

Once you have given your customers a limit and a number of days credit, the most important thing is to make sure that they stick to both. The best credit control departments will contact their customers a week before the end of a month when sums are about to fall due and check that their books agree and ask when payment will be made. I know that some companies shy away from this thinking that it might appear that they are being too pushy but it prevents any of the "oh we haven't got that invoice can you email a copy?" which can arise after the debt is due. I strongly recommend that you do this check as you will be surprised how many accounts departments will claim missing invoices. If you find it onerous, concentrate on the biggest sums owed to you as these will have far more benefit than chasing lots of small customers (see my blog on the 80/20 rule).

If payments don't arrive on time, start to chase straight away. Every day you ignore a debt will put further pressure on your own finances. Initially make a phone call. Make sure that you get through to the person responsible for paying. Ask them politely when they will be paying and, if this is satisfactory, make a note in your records together with the name of the person you spoke to and put a note in your diary to check that they keep to their word. If they don't do as they said you must phone immediately and ask them why.

If their response to either your first or second call is not satisfactory you must suspend their credit and allow them no further goods. I know that you will be in conflict with your sales team but if a customer can't pay on  time and fails to provide a good reason there is no point in selling more to them until you are satisfied that they are able to pay. If your customer fails to respond to a second phone call you should issue a formal demand for payment giving them seven days in which to pay and stating what your next action will be if they fail to do so. I would recommend that the threat should be legal action through the small claims court ( but only make the threat if you are prepared to carry it out. By acting swiftly in stopping credit and taking customers to court you may alienate some customers but when you subsequently receive notice that they have gone into administration or liquidation you will, hopefully, be one of their few suppliers to have escaped unscathed.

A couple of further tips.

1 If a customer claims that a payment is in the post, look out for the envelope and see if it was posted when they claimed it was.

2 Customers often stall by asking for copy invoices. You can preempt this by taking the action suggested above and phoning before the due date but again, if you don't have time, make sure that you phone those who have previously asked for copies as it tends to be habitual.

3 Be polite but firm, if customers become aggressive the odds are that they are unable to pay, after all if they were able to do so there would be no need for them to shout.Remember that you are only asking for what is due to you. 

4 If you do have to write an account off as bad think how many sales you would have to make to get that money back and remember that good credit control is the best way to prevent bad debts.

5 If a customer builds up a record of late payment investigate the reasons. If necessary ask their boss if there is a problem. Don't ignore it just because they buy a lot. There may be a legitimate explanation but you need to know what it is.

6 Don't be bullied by big corporations. They often make slow payment a matter of policy and, because they are big, they expect you to bow to them. Treat them just as you would any other customer.

7 When rumours reach you about customers in financial difficulty, ignore them at your peril. Don't spread them any further but contact your customer and tell them what you have heard. Sadly the old saying about no smoke without fire often turns out to be true.

8 Always follow up your phone calls. Keep good notes on what has been agreed and always do what you say you will do. Don't be fobbed off by weak excuses. 

9 If a customer asks for time to pay, be reasonable and agree to a fair repayment schedule but make sure that the customer sticks to it - you could ask for cheques up front and promise not to pay them in until the agreed time.

10 Finally, always be suspicious of sudden large bursts of buying from previously small accounts - especially if you know that they normally favour one of your competitors. It may be perfectly innocent and reflect your superior products or an extra effort from your sales force but it may also mean that credit has been refused elsewhere so just be on guard.

I hope that this simple few paragraphs have emphasised the importance of keeping on top of what you are owed and has given you a few hints on how to carry out credit control efficiently.