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Opinion
Can ineffective credit control kill a business?
Credit control is one of the most important parts of any business and the lifeblood of cashflow. If your firm gives credit terms to its customers, controls must be in place to ensure monies are collected in a timely fashion, reducing bad debt and increasing cashflow. Many firms are reactive to collecting
overdue invoices, making it harder. Typically businesses believe credit control begins once the credit terms have elapsed and an invoice becomes overdue. Sending statements once a month is simply not effective enough –many businesses rely on old-fashioned methods to remedy their credit-control problems. Credit control should be seen as methods
to collect monies due on invoices within a nominated credit period. Being proactive and knowing your client is key. Being unafraid to ask for payment is one of the biggest issues we see in modern-day business, as many people do not want to upset their customers. Credit control starts at the point of sale,
agreeing trading terms with client before any product or service is supplied. The more work done before the invoice is overdue, the more likely it is to be paid on time. So asking your customers if they have received the invoice, if it has been authorised for payment and a payment date set, is all good practice. What if a debtor does not pay on time?
Formulating procedures of how your firm deals with late payers will help reduce bad debts. Putting clients on stop if you experience non-payment after 60 days, for instance, helps reduce any further exposure to bad debt, but it does not help to collect it! Top tips for increasing your cashflow:
do not be afraid to ask for your money, do not rely on sending letters, statements and e-mails – get on the telephone to your client. Credit control should begin as the invoice is sent out and only finish once the invoice is collected.
Gareth Fawke Director, Inksmoor Finance Group
‘Need to be clear on terms up front’
Credit professionals have been warned to be clear with their customers over their payment terms and potential penalties at the start of the relationship to avoid problems later on. Speaking at a debate, last month, run by
CCRMagazine in association with Equita, John Turner, credit manager at Johnson Tiles, said: “You should make sure that you actually tell your customers, from the word go, about the consequences of not paying you to time. Are you going to charge penalty interest and enforce it? Will you put that customer on stop? Yes I will! They have to sign to our terms and conditions, so we have to assume – rightly or wrongly – that they have actually read them. It is in there: six days from the due date, they will go on stop and 14 days later we will take whatever further action we deem necessary. Know your customers – and be up-front with them! “It is very much a question of where
things sit in the hierarchy: where does the sales person sit, and where does their influence end? The salesman should not have the authority to make an agreement outside of the standard terms and conditions.” Nina Morris, head of litigation at British
Gas, added: “Two significant areas for me are the need not to shy away from asking the very basic questions and the importance of data and analysis. It strikes me that sometimes people are so keen to be seen as experts that they shy away from asking fundamental questions, such as what it is that we are trying to achieve or what is our risk appetite. To my mind, it is extremely important to get the right foundations in place before moving forwards.
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www.CCRMagazine.co.uk “Secondly there is the issue of data. In a
company of the size and scope of Centrica, we have significant amounts of data. It is extremely important that we ensure that the data we have is analysed and used intelligently in order to drive performance.” Martin Wheeler, UK credit manager at
CEMEX, agreed: “The big question is always why are they asking for those terms? Is it just to support their cashflow, in which case, why are we, as a business, being asked to do that? It is a challenging environment for everyone and it is not our job to support their cashflow. You can flip it and ask, if they are having problems with their cashflow, from a risk perspective, should I be worried about them?” Meanwhile, Perry Burns, managing
director of Working Capital Partners, said: “Some of this can be very specific to your situation. I could not agree more that, if you are up front with people, then they should understand what it is that you are trying to say. The difficulty comes when you have an inequality of power in the transaction. “From the credit manager’s point of view,
you know that you need all the information and to be prudent in your lending, but the sales people, will be looking at all the commercial reasons to give the credit: how good an account it is and what the consequences would be for the company if you lost the account. And they will warn that if you charge penalty interest on late payments, then the consequences would be significant. “In the end it comes down to a balance of commerciality versus credit prudence.”
January 2017
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