Cash is King! It does not matter how big your sales figures are. If you’re not making sure there is cash in the bank, then your business will fail.
Good credit control systems are what really make a difference to achieving a healthy cash flow.
In this blog I want to make it clear what a strong credit control system should contain.
How good are your systems now? Do you know on average how long it takes your customers to pay you? If the answer is no to this I suggest that you work it out. The link below will help you to do this. This is called your average debtor days.
What are your terms of trading with your clients? If your terms are 30 days and your average debtor days figure is 45 days, then this would be classed as acceptable by most businesses. However, if your debtor days figure is 60 days or higher, it would suggest your credit control system should be reviewed.
If you are experiencing cash flow problems then most likely your credit control system is not working.
Credit control starts right away, when you receive an inquiry from a new customer.
If you are selling products and a new customer rings or emails to place an order, or they are buying via your online shop, you should capture as much information about them as possible at that point. With online shops they will pay up front normally so this avoids cash flow problems. With phone and email orders it is best to make first orders pay up front as well and then ask them to open an account with your company, for future orders. Ask for detailed information about them, check out their credit history and get some trade references. Make sure the feedback on the credit history and references is OK before sending any further products to them. It is also wise to set credit limits to customers depending on the information you get back. I.e. so your terms may be a credit limit of £2500 and 15 days for one customer, or £5000 and 30 days for another. Your accounting software should be able to keep track of this information for you, within the customer records.
There are many examples on Google images of trade credit application forms that show the important information to capture from your new customers.
Make sure that within your trading terms and conditions it clearly states about the supply of goods and services, and make any new customer sign and agree to these before any trading happens.
It might make sense for your customers to sign an agreement for services and to keep a log of different stages of a job, and how payment should be made. Don’t rely on a handshake or “gentleman’s word”. Get it down in writing and get it signed off, so you have the proof of the debt, should you need it.
Ask for deposit payments up front on larger orders or larger quoted works to cover your initial costs outlay.
On your invoices, always state the ways your customers can settle their bills and remind them of your payment terms. Give them as many ways to settle their debts as possible: BACS, Cheque, Cash, Credit Card, PayPal, Go Cardless, Direct Debits, Standing Orders, etc.
Raise you invoices as soon as the work is completed or the goods are shipped. Do not wait to the end of every month before invoicing all your clients. If you have sent out products or completed work for a customer at the beginning of a month, don’t wait until the end of the month to invoice them. You are effectively giving that customer 30 ish more days to pay.
So that you have back up to prove you have supplied goods or services, get your customers to either sign for delivered goods or sign off when work has been completed.
Send out statements to all your customers at the end of every month. Anybody that is going over their allowed credit or over the payment due days, (your accounting software should give you an Aged Debtors detailed report that will show this information) should be chased either by email or phone as soon as possible. In general companies will pay the supplier that makes the most nuisance of themselves! If your customer knows that if they don’t pay within the terms, you are going to be emailing and ringing them until they pay up, they are more likely to pay you before another supplier that doesn’t chase as hard.
Sending statements out also ensures that your customer know how much you have invoiced them and what is still outstanding. If any invoices have gone astray then your customers should be asking for copies. Some companies only pay on receiving a statement from a supplier.
If by phoning or emailing you do not get an acceptable response to your debt chasing, then you will need to send out credit control letters.
The link here, from Crunch.co.uk, gives good examples of these letters and when to send them. https://www.crunch.co.uk/blog/small-business-advice/2014/11/14/late-payment-reminder-letter-templates/
As per chasing letter 2, you have every right to charge your customers interest on any late payments and claim for any debt recovery costs. The rate of interest you can charge is set by the Bank of England base rate, plus a certain percentage. At present it is 8% plus base rate. This link to Pay on Time’s website gives you up to date information on what you can charge and claim. http://payontime.co.uk/how-to-calculate-late-payment-interest-and-compensation
If you customers still refuse to settle their bills following phone and email chasing, statements, letters and charging extras, then you must put the account on stop. This is where you would send out letter 3 and threaten legal action.
Most businesses would have already settled by now, but the threat of legal action by your solicitor or maybe being taken to The Small Claims Court, will usually make the few remaining pay up, to prevent having CCJs (or County Court Judgements) against their companies. You can find out more here about The Small Claims Courthttps://www.gov.uk/make-court-claim-for-money/overview . This is where all the data, history and documents you have been keeping on your customer really makes a difference and why they are so important. You have the proof of the sale and debt.
You could try offering payment plans, breaking down the debt into smaller chunks over a few months.
You could take out late payment or bad debt protection insurance to cover any unforeseen bad payers.
Keep your frustration off of social media! Remain professional in front of your other customers.
I hope this has helped. If you would like advice on setting up a credit control system or training for some of your staff, please get in touch. The first 2 hour consultation is free to assess how your debt chasing is working now and to give you advice on what needs to be improved. Call 0808 123 1399 or email firstname.lastname@example.org .
Tina Marie Parker, business advisor and trouble-shooter, has been helping businesses for nearly 30 years. From start-ups to succession planning. From companies going through rapid growth to companies desperate to see some growth. She helps them thrive and survive. Great business advice and hands-on support for your organisation, getting the desired results, fast.