Cash and Credit Control

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It is painfully common to see companies which are desperate for cash neglecting a critical part of the cash cycle - credit control.  Here is what is required :

  1. Make sure you agree credit terms with your clients  e.g. 'payment terms require settlement in cleared funds thirty days from the date of the invoice'.  Make sure they see these terms in advance, either in the contract, in terms and conditions supplied with the quote or before they click 'buy' on the website.  The key thing is that they should not be able to turn around and say, "I didn't know that till after I bought."

  2. If the nature of the business means you are at risk, that is you will have spent significant money and stand to lose if they don't pay, make sure you do a credit check (or get cash upfront).  Many online agencies provide credit reports. Shop around, as some price outrageously.

  3. Set a credit limit for each new client.  The limit is the amount you would be prepared to risk losing if they default and sets the level of trading you are prepared to do with this client.  If they place orders over that limit, require them to pay cash up front.  Be generous, trust people, unless their credit report smells.  "Unlimited", I hear you say.  Wrong.  It only takes one to take advantage - don't make it easy for them to rip you off.

  4. Make credit control a specific person's responsibility. This is to make sure it gets done and to have someone held accountable.

  5. Monitor credit extended. Overdue amounts are cash not in your bank account that should be. Monitor by means of :

    • Aged debtors report  (summary, showing how much is, say,  Current, 30 days, 60 days, 90 days old by client);

    • Debtor days trend -  a graph to help you keep an eye out for any deterioration. The total  number of days over your standard terms is the amount of cash missing from your bank  e.g. 65 days could be 35 days over standard terms, representing more than a month's sales in cash.

    • A weekly or monthly problem report.  Your credit controller should give you a brief list showing who the problem payers are, what actions have been taken, what responses received.  Generally this is not so that you can take action or make a decision - you should have given the credit controller responsibility to act already.  It is your check to make sure cash is not being neglected. Yes, it is counter-intuitive.

  6. Have a clear credit control cycle :

    • invoice on time

    • make sure everything gets invoiced  (it happens, systems have weaknesses)

    • issue monthly statements of account to clients

    • highlight overdue amounts on statements and provide copy invoices

    • chase by telephone - a first call early on, especially with large amounts :  "Are there any problems ?", "Were you happy with our service ?",  "There is no reason why we shouldn't expect to be paid on time, is there ?" or "When should we expect payment ?".  The credit controller should keep a record of these conversations.  Later calls then have  evidence available so that your credit controller can say "You promised x on date y. What happened ?".  Note that these calls are typically accounts department to accounts department; your personal relationship with the client is not at risk, especially as you are not making these calls, your credit controller is.

  7. Resolve issues that come to light quickly.  Make the customer happy.  We don't need to say that, do we ?

  8. If credit control calls have not resulted in payment, send a seven day Final Demand letter.   Promises have been broken, repeatedly. Games are being played, you are being strung along.  Some businesses just do this. It is the game they play, even very large, 'reputable' ones.  A number are just waiting for the seven day letter.  Do not be shy about sending this.

  9. Institute legal proceedings.  It is possible to do this yourself; that is, for you to delegate this to your credit controller to do via the very effective online courts procedure.  If that is not practicable, because of the sums involved or because your credit controller has enough jobs to do, employ a lawyer specialising in the field. They will be able to provide you with a fees schedule in advance, so that you know how reasonable their terms are.

 

Using your credit controller helps to distance you personally from the procedure. You can then play good cop to you controller's bad cop.  But don't, please don't, make your controller's job a nightmare by refusing to let them follow the procedure outlined above.

Don't be soft just because it is a big client. Clients respect a polite request for payment in agreed terms. Also, some firms may get their purchasing staff to manage the purchasing cycle by prioritising  those who ask.  If you don't ask, you go to the back of the queue.

Credit control is a key business task.  It is just one of the controls FDPO check are in place and ensure are functioning properly when called in to help.

Last modified on Wednesday, 25 May 2011 08:59
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