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NiLegal
Credit Control – A firm grip
In a credit crunch the money supply reduces and the cash flow of every business is
affected. Businesses with poor credit control suffer the most, as other companies take
advantage to solve their own cash flow and liquidity problems.
The solution is to review and set clear financial policies.
Making customers WANT to pay
The first step is to ensure customers want to pay within agreed terms.
The very best way to achieve early settlement is to make it in their interest
to do so.
You might offer a cash discount for early settlement. Discounts are a
valuable tool as any debtors who do not take up lower prices are very likely
to have cash flow problems and further credit should be restricted.
Any system should include accurate accounting records, prompt issuing
of invoices and regular statements. Customers who go over the allowed
credit limit must be sent a series of letters, worded to ensure the customers
take action to pay outstanding invoices.
Letters should be sent at predetermined intervals and each should
encourage immediate payment by escalating the effect if payment is
not made.
Keep up the Pressure
Your first letter should advise the debtor that the standard terms and
conditions have been exceeded and payment is required to maintain a
sound trading relationship. The next letter might advise that penalties and
interest will be charged if payment is not made.
Remember if you accept a payment that is less than the amount you
billed, it will be taken as an offer of full settlement. In most circumstances
request and accept only full payment. Occasionally, you may decide that
some money is better than none or that part payment is justified but only
agree this when you are sure it is the best solution.
In your Interest
There is a statutory right under the Late Payment of Commercial Debts
(Interest) Act 1998 to – charge interest on late payments and claim
reasonable recovery costs.
In the UK the interest rate a business can charge is fixed twice annually:
on 30 June and 31 December and is applicable for the following 6 months.
A rate fixed on 31 December applies from 1 January to 30 June the
following year.
The rate charged is the Bank of England base rate plus 8 %. A base rate
of 5 % thus entitles you to charge 13 %.
There is a set schedule of reasonable debt recovery costs. These are £40
for debts under £1000, £70 for debts between £1,000 and £10,000 and
£100 for debts over £10,000.
If the customer still ignores your letters, the next one should advise them
that future orders will be placed on stop. Such action may harm future sales
but it is better to restrict exposure than continue to extend credit where the
prospect of never being paid has increased.
If payment has not been received by this stage, then a serious situation
Early instruction is vital here – delay is the enemy of
has developed. The debtor has implied that interest and penalties are good debt recovery.
preferable to paying and they are prepared to risk not receiving further
goods and services.
Legal Action
At this stage you have to consider legal action to recover the outstanding
balance. Legal debt recovery should be invoked to avoid the whole balance
becoming a bad debt, which may never be recovered, with the
consequential effect on both cash flow and net profit.
For further advice and assistance contact Michael Morse of Godloves
Solicitors on 0113 225 8811 or mmorse@godloves.co.uk.
14
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NURSERY INDUSTRY
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NOVEMBER 2009
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www.nursery-industry.co.uk
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