Cash is King! Poor cash flow is one of the most common reasons for business failure. You work out how much money you need to meet the set up costs. It’s just as important to have enough working capital to tide the business over till money from customers starts to come in and to provide a cushion in case some of them pay late, or not at all.
Good credit control is vital for healthy cash flow. It’s not just about collecting debts - it’s about making good decisions about giving credit in the first place, monitoring things carefully, and then if things go wrong, taking prompt and effective action.
Here are a few ideas to help:
Know who your customer is: sole trader, partnership, LLP or limited company? We are often asked to collect debts for clients who have dealt with pubs or restaurants, and the only information they have is the trading name of the pub or restaurant. They don’t know whether the business is run by a sole trader, a partnership or a company. If things go wrong, it can be difficult for them to prove who the debt is owed by. Using a credit application form where this information needs to be recorded can reduce the scope for disputes later.
If you’re dealing with a sole trader, get his home address too, and the home addresses of all the partners in a partnership. You can sue any individual partner for the whole debt, and knowing where they live makes this easier. You also know where to send the enforcement agents if they don’t pay a judgment.
Get the company number if your customer is a company; company names can be changed which can lead to confusion, but the company number does not change.
Do your homework. What do you know about the customer? How long have they been trading? Do you know anyone else who deals with them that could vouch for them? Think about getting trade references, or a credit check.
Set a credit limit and stick to it. We regularly see clients who have set a limit after careful thought and investigation, but end up letting the customer have goods worth sums way in excess of the credit limit, and find that the customer is unable to pay.
Trading terms and conditions minimise the scope for disputes. They can provide for interest, for speedy reporting of short deliveries or quality issues (often raised by unscrupulous debtors very late in the day, to stall for time), and can be used to limit your liabilities if anything does go wrong. It is important to make sure that they are tailored to your business, not just copied from someone else. Apart from potentially being a breach of copyright, another company’s terms will be drafted to take account of the way they operate, not the way you operate. The clause that you think protects you might not actually offer any real protection because your business is structured in a different way.
Have a good paper trail; raising invoice queries is a common way of stalling for time. Make sure that the details on the quote match the purchase order, the order acknowledgement, the delivery note and the invoice. And get the order right first time.
Keep an eye on payment patterns; if a customer suddenly starts taking longer to pay, talk to them to find out why. Early action can often lead to you agreeing a course of action with the debtor which can result in you being paid sooner, or alert you to a problem so that you don’t continue to supply.
Taking the time to get to know the people responsible for making the payments is useful; people tend to pay sooner if they feel that they have a relationship with you.
Have a credit control policy/timetable to deal with late payers and stick to it. A typical policy might be to write a letter/send an email when the debt first becomes overdue, follow that up with telephone calls after 7 or 14 days, and then send a further letter after 7 days, and a final letter threatening to pass the debt to solicitors or debt collectors after a further 7 days. Following through with that and doing what you say you will is vital; once you get a reputation for meaning what you say, you’re likely to be paid sooner.
As Benjamin Franklin said, “By failing to prepare, you are preparing to fail”. Prepare before making chasing calls; know all the details and what you want to achieve. Keep notes of calls, so when the debtor tries to suggest that you agreed something different last week, you can put him right.
Get a commitment to action from your customer, with a deadline. That might be a commitment to pay, or to look into a query, or to contact you within 7 days of you providing copies of a “lost” invoice.
Do what you say you will do; if you’ve said you’ll call back in 7 days, make sure you do it.
Claim interest and collection costs if possible. Remember, if your contract doesn’t contain the right to claim interest, but you deal with other businesses rather than consumers, the late payment legislation allows you to claim interest and a fixed amount per contract together with additional reasonable costs to cover collection costs.
Attend our regular Credit Controllers Networking Lunches, which give you a chance to swap ideas with other credit controllers, ask us questions “off the clock”, and listen to guest speakers talking on debt recovery related issues.
Get to know a good debt collector, or solicitor specialising in debt recovery, so that when you do get a case where proceedings have to be issued, you know who to use.
A private company limited by shares, being owned by a married couple and thei...