According to research released earlier this year, the average UK SME is chasing five outstanding invoices at once, wasting an hour and a half every day. In total, this means that almost 900,000 hours a day are wasted by companies trying to get paid for work they have done.
This makes for pretty sobering reading, and it’s no wonder that the UK’s small and medium sized businesses are facing a fight for survival. Throw Covid-19 into the mix, and you can see how it’s absolutely critical for the financial health of your business to have a robust credit control policy and procedures in place.
We’ve created these easy-to-follow tips which will allow you to collect your outstanding debts quickly and with confidence:
Step 1 - Assess risk and control who you give credit to.
If a stranger turns up at your home and asks to borrow some money you’re not going to hand it over without first being confident that they’ve got the means to pay you back. So why act differently when it’s your business?
Make sure you know as much as possible about a potential customer before you start trading with them. A good place to start is with a comprehensive financial report containing the company’s profit and loss, balance sheet and key ratios. Then, using this, set a credit limit based on a combination of predicted turnover and payment terms and put measures in place to monitor it on an ongoing basis.
You can find more detailed instructions here.
Step 2 - Have a credit policy and stick to it.
When it comes to credit, there’s no such thing as an exception to the rule. Get a policy in place and ensure that it’s bought into by all departments and then stuck to from then on.
It’s relatively straightforward to construct a basic credit report, and this is essential for any business offering credit. This link contains a handy guide to what this should contain.
Step 3 - Build customer rapport and develop ongoing relationships.
The key to effective credit control in any business is the human touch. It’s about establishing a relationship and then using this to ensure all communication is clear and timely.
A quick check with the customer to ensure they’ve received the invoice and there are no problems will make it considerably easier to chase should the debt fall overdue. And don’t be afraid to regularly check-in with customers that they’re satisfied with the collections process, or to make changes if it becomes clear that any are needed.
Step 4 - Have the right staff
Credit control is a key role within any organisation, so recognise it as such. Giving the job to the wrong kind of person can be catastrophic as you could lose customers and cost the business a lot of money.
Don’t lump it in with the other responsibilities of someone in the finance or admin team. They more than likely won’t have the appropriate skills for both roles, meaning they will be reluctant to do it, and it will cease to be a priority.
Likewise, don’t make it the job of the salesperson or account manager with the best relationship with that customer. This leaves them in a compromised position as they will always have the carrot dangled of a new contract or more business if they allow extensions to the payment terms.
Depending on the size of your business, the best options are either to have a dedicated Credit Controller, or if this isn’t financially viable consider using an automated collections process like itsettled.
Step 5 - Have an adequate Query Management System that everyone supports.
There are many reasons why this is a good idea and can help to anticipate any potential issues:
- see which customers may be unhappy with your processes
- eliminate a major reason for payment delay by identifying those customers who are “won’t payers” and “can’t payers”
- see where you can improve your processes and streamline for the future
- release cash from your Order to Cash process into your bank, where it belongs
- support specific staff members with performance improvement measures to eradicate future issues
Step 6 - Communicate all issues quickly both internally and externally when required.
In today’s economic climate it’s no longer enough to run an initial credit assessment and then monitor the finances for risk purposes. Make sure your business has a policy of communicating anything and everything that is heard about your customers, no matter how unimportant anyone will think it is.
This is where the strength of your customer relationships can help again. Don’t be afraid to open the lines of communication with your customer about any concerns, and even request management accounts if you feel this is appropriate.
Step 7 - Report and Review progress regularly.
There are several reports that will help you monitor the performance of the credit function in your business:
- Aged Debt Report
- KPI reports including debtor days and bad/doubtful debt targets
- Cash flow forecasting for 3-6 months in advance
- Top 20 customer detailed report of debt and any queries.
- Outstanding query report by division.
- Bad debt provision amount vs bad debts to date.
A combination of the above should be reviewed on a regular basis, with progress monitored closely and any issues acted on quickly.
Small and medium sized businesses (SMEs) across the UK are chasing a combined £50bn in late payments, and in the process are being distracted from their day-to-day operations. Follow the tips above and give your business the best chance of avoiding being added to this statistic.
For more insight on how much extra you could add to your cash flow and to see if your credit control is as effective as it should be, use our handy days sales outstanding (DSO) calculator.