Having clear, efficient credit control processes in place is absolutely central to ensuring your business gets paid the cash it is owed before your daily operations are affected by lack of payment.
After all, bad debt can kill any company’s cash flow, regardless of its size or success.
Chasing aged debtors is often a tricky aspect of my service, but it’s one that is vital to my clients’ ability to stay afloat. Here, I thought I’d share my ten top tips on implementing and improving your own approach to credit management to avoid those dreaded cash crunches.
1. Send your invoices on time
You’d be surprised how many businesses fail to invoice their customers as soon as payment becomes due. Make sure that your invoices are always accurate, complete, and sent promptly! Clearly state the payment due date on the document and provide all the necessary payment details, including acceptable payment methods and instructions. This will remove any of the common barriers to payment.
2. Make sure your credit terms and conditions are clearly defined
Create clear and well-communicated credit policies, including payment terms, credit limits, and any late payment fees or interest charges. Always ensure your customers are aware of these terms upfront and provide them with written agreements or contracts to save any confusion.
3. Review your credit terms
If you have previously allowed your customers to pay within 60 or even 90 days, and this is creating problems internally, consider bringing these terms down to 30 days.
At the very least, you should try to negotiate a better deal with your account holders on a one-to-one basis. If they are generally happy with the products or services you’re providing, and your customer service has been consistently strong, most businesses will be willing to accommodate some reasonable changes to your payment terms, including working to Net 30. If you meet some resistance, refer them to instances where they have failed to settle their outstanding balance on time, and explain that you are adjusting your credit limits to reduce the risk to your organisation.
4. Get the right strategy in place
What happens if a customer fails to pay an invoice on time? Are you straight on the phone to request timely payment – or do you forget to chase and leave the debt outstanding for days, weeks, or even months on end?
Having a clear, joined-up strategy in place for late payers is essential. I recommend following the below procedure (or something similar):
- Reminding the customer of your payment terms at the point of purchase or when the order is fulfilled
- Sending a reminder letter on the day the payment becomes due
- Sending subsequent letters every 7 days until the payment has been made
If the above doesn’t work, you may want to consider phoning the customer directly, visiting them in person, or passing the debt over to a debt collection agency. The latter should be considered a last resort; it’s only really an option once you’ve explored all other avenues, including getting a professional bookkeeper (like me!) to help chase your payments on your behalf.
5. Screen new customers thoroughly
Always ask your new customers to complete a credit application form so you can capture their business details, financial references, and trade references. From there, you can verify their creditworthiness and make more informed decisions as to what kind of credit terms to offer them.
You could go one step further by creating a credit report for each new catch, but bear in mind that there is a cost involved in this. Some websites allow you to check credit risk online; CreditSafe offers a free trial, and Experian offers a similar (paid for) service, too.
6. Monitor and analyse your receivables
Regularly track and analyse your accounts receivable to identify trends, patterns, and potential risks. This will help you spot any problematic customers or payment issues early on, allowing you to tackle any red flags right away, if you need to.
7. Offer flexible payment options
Sometimes it helps to give customers a range of convenient options, such as online payment portals or electronic fund transfers, to encourage faster and easier payment.
8. Offer early payment incentives
Provide early settlement figures for customers who can pay on or before their invoice due date. You’d be surprised how much of a difference this can make; after all, every business wants to get the best possible deal. You might worry that these incentives will begin to eat into your profit margins over time, but they can be incorporated into your pricing structure from day one to save any losses.
9. Resolve disputes quickly
Perhaps your contact feels that they were over-billed, or maybe they’re convinced that they haven’t got what they paid for. Either way, if a customer has a question or an objection, and this is giving them good enough reason to withhold payment, the best thing you can do is make sure the problem is dealt with quickly.
This might mean escalating the issue to the sales representative, the account manager, or even your management team so they can discuss the customer’s concerns in more depth and agree a way forward that works for everyone involved.
10. Focus on creating good relationships with your customers
Be the business everybody wants to pay one time! Maintain open and positive communication with your customers, and work hard to build strong relationships based on trust and mutual respect. This can encourage timely payments and create a more collaborative approach to credit control that often softens those fraught finance-related interactions and lessens frustrations on both sides.
The key thing to remember when it comes to successful credit control is: never ignore the problem and hope it goes away! As you can see, there are plenty of ways you can encourage timelier payments and reduce the risk of bad debt within your business – you just need to be proactive (in a fair and diplomatic way, of course).
