Taking back control

Taking back control

What is credit control and why is it so important? Put simply, credit control is the practice of making sure your customers don’t take too long to pay you. This is really important for the cashflow of your business.  With most businesses you have to pay out for a large proportion of your costs e.g. wages and rent before you are paid for the products you have made.  Businesses therefore need working capital i.e. cash reserves to bridge this gap.  

The longer it takes to get paid from a customer the more working capital you will require to keep your business afloat.  Credit control is therefore a fundamental aspect of your business in particular if, like most businesses, you have limited cash resources.

Clear communication with your customers is imperative.  Ensure they know before you commit to supplying them what your terms of business and payment terms are. Some businesses ensure their customers acknowledge this by signing a purchase order. These terms are further reinstated when you send the invoice to your customers.  ‘Payment terms’ should be clearly set out on the invoice, including the number of days that you will allow them before they send payment and how they can make payment.

In an ideal world you would ask for immediate payment, however your customers are also managing their own working capital issues and typically most businesses allow 30 or even 60 days.   The terms that you can dictate will depend upon how strong your customer relationship is, the demand for your product and what your competitors are offering.  It goes without saying, the longer you allow customers to pay, the larger the impact on your cashflow and the more working capital your business will need.

If your customers take longer to pay than your terms state, then you will need to chase payment.  This is called credit control.  This is really important, if you don’t chase the customer will have no incentive to pay.  He who shouts loudest often gets paid first!

Building a credit control system

How can you build an effective credit control system? This should ideally start before you have supplied goods and services to a new customer, by checking their creditworthiness. Whilst not practical for lots of customers with low value orders, for customers who may be purchasing a high value order, you can get an online credit rating about them or ask for credit references from other suppliers.

You may insist on payment before delivery of goods and services, but most businesses will allow some form of delay before payment is necessary. Decide on a policy of how many days credit you will offer.  Whilst industry practice may dictate this calculate how much reserves you hold.  There is no point offering 60 day terms if your business only has sufficient working capital to last 30 days.  Again make sure it’s clear on your invoices.   

Late payments

There is legislation to protect business from late payments called the ‘Late payment of commercial debts (Interest) Act 1998.  This entitles on a day rate for all business to charge interest of 8% plus the current BoE interest rate for late payments.  If you are concerned about late payments it is worth stating on your invoice that you will seek to collect under this legislation if payment is late.  This can be a useful deterrent.  Other ways to encourage timely payment include offering discounts for swift payment, however think about the impact of this as it will reduce your profit margins.

If the payment date has arrived and you haven’t received funds, then you must take action. Often an e-mail or quick call to remind your customer will do the trick. However, if you have trouble getting hold of the customer or they seem unlikely to pay, you may need to be more persistent, which can be time exhaustive.

Chasing payments

If you’re a small company, you may not have specialist credit control staff or as is often the case in small businesses, those in charge of sales often do the payment chasing as well.  This is sometimes not ideal and creates a conflict of interest within your organisation as they do not want to upset the customer.  If this is the case, get someone else in the organisation to do the chasing or think about using a third party credit controller or virtual PA.

If you have further trouble collecting the payment, for example, if you are unable to contact the customer directly, then think about employing a debt collection agency. They will charge a fee, typically around 10%, but it will leave you to concentrate on running your business rather than spending time chasing debtors. Make sure that any agents you appoint are registered with the Financial Conduct Authority. The Credit Services Association has a list of reputable debt collection agencies.

Legal action

Whilst an uncomfortable decision, if you become aware that debts are not being paid in time and your customer is avoiding you then ensure that no further orders are processed until the issue is resolved.  Legal action is the last resort but it can be expensive so make sure that the cost of legal action will not be more than the debt is worth. For debts with a fixed amount you can always file a claim online in courts for any amount up to £100,000.  There is a filing fee which ranges between 0 and 4.5%.  If however; the debt is over £5,000 and disputed or unquantified you are always recommended to seek legal advice on how best to proceed.

Tips for building an effective credit control system:

  • Get references for new customers
  • Use an online credit rating service or ask for trade references
  • Set out clear payment terms on your invoices
  • Make sure the invoice is accurate
  • Send the invoice to the right person (especially in big firms) - it can’t be paid if it isn’t received
  • Establish a diary system to chase late payers - find a firm to help you with this if it’s uncomfortable
  • Chase debts through the legal system if necessary but be prepared to write off debts that are costing more to collect than they are worth

For more information, refer to The Credit Services Association and court claims information on the Gov.uk website.