An A-Z of credit control best practices
With so many credit control best practices to learn it can be hard to keep on top of them all. So we’ve compiled a list that shows that credit control can be as simple as ABC.
It’s likely that you’re already doing many of these, but maybe there are some you haven’t previously considered. How could you improve your credit control processes?
Account opening forms
Knowing your customers before committing to offering credit terms is vital to prepare and protect your business from late payment. This can be achieved by utilising account opening forms which allow you to obtain all the necessary information about your customers before trading with them.
Not sure what you need to know? Here are 8 important questions you should ask every customer.
Customers can be quite creative – and often very believable – with their late payment excuses, so it’s important to be sceptical of the excuses they give to protect your cash flow. Whilst some of the reasons for late payment will be genuine, most of them are simply a stalling tactic to avoid making payment. So, don’t just take their word for it. Ask the right questions and chase at regular intervals to encourage prompt payment.
Credit reports are a great way of protecting your business against late or non-payment of invoices as they offer a quick and easy way to determine a customer’s creditworthiness. The information gained from a credit report can then be used to help you decide the length of terms to offer, if a full or partial payment is required and even if you should do business with them at all.
Days sales outstanding
Calculating your day sales outstanding (DSO) can help to indicate the efficiency of your credit control processes, allowing you to make changes where appropriate to improve your performance. DSO is the average number of days it takes for a business to recover monies in full after a sale has been made. Using this calculation you then have a benchmark which can be used to check how well your credit control team is performing and to see if a customer appears to be having trouble making payment.
Early settlement discounts
Early settlement discounts provide an incentive for customers to pay up promptly, ensuring you get the money you’re owed within terms and reducing the cash flow gap between paying suppliers and getting paid. Although this would lead to a slightly lower profit margin, it’s worth remembering that sometimes it can be more beneficial to be paid the majority of an invoice’s value early than receiving the full amount beyond agreed terms.
The cash flow hole often created by trading on credit terms can be reduced by finding a suitable funding facility to cover the gap. Invoice finance is a popular solution as it allows businesses to release funding from invoices ahead of being paid by their customers.
It sounds obvious but the most important aspect of credit control is getting paid on time. You can increase your chances of this happening by offering multiple payment methods so that it is easier for your customers to pay. Whichever payment methods you choose to accept, it’s vital to include all the information your customers require when making the payment on your invoices.
Particularly in smaller businesses which may not have enough resource to dedicate to credit control, team members with limited experience will take on the role. Whilst this seems like it is saving money, the lack of experience and expertise can actually be quite costly. By hiring a trained credit controller you will benefit from a dedicated and focused collections effort that will keep cash flowing through the business.
Innovation is key to transforming your credit control processes by making them more efficient and easier to manage. In recent years, advances in technology have significantly reduced the amount of time it takes to perform credit control tasks by automating processes such as sending out invoices and reminders. By utilising better software you too could benefit from better credit control results.
Businesses can utilise credit circles to gain extra insight into the creditworthiness of customers, both existing and new. Often made up of members of a trade association, credit circles allow businesses to share and access important creditor trends with fellow companies. This information can be vital in determining which companies are too risky to trade with.
Filing, both paper and electronic, is arguably the most boring task for any credit controller. But keeping a record of all your invoices, signed terms and conditions and proofs of delivery could help you get paid if there is a dispute with payment further down the line. You never know when you might need to refer to these documents so make sure that they are stored in a safe place and that you have a backup just in case.
Late payment interest
Did you know that when an invoice exceeds terms you can charge late payment interest to help cover the costs of chasing the debt? The Late Payment of Commercial Debts (Interest) Act allows businesses to charge interest of 8% plus the Bank of England Base Rate as soon as the debt can be classed as overdue. Businesses are also eligible to claim debt collection costs of between £40 and £100, depending on the value of the debt.
Monitoring your credit control performance regularly can help to highlight where you can make improvements to your processes. By highlighting what’s restricting your cash flow or credit control efforts, you can take the necessary steps to protect it going forward so that you don’t make the same mistakes again.
It’s important to keep a record of all correspondence you have with your customers. Not only will this help to build better relationships with your clients, it can also help to settle disputes. So every time you make a phone call, send a letter or an email, make sure you have a record of it so that you can refer back to it later if needed.
Not all businesses have the in-house capabilities to conduct effective credit control. In these instances, outsourcing all or part of your credit control function can give you back time and resource to focus on your core business whilst delivering expertise, knowledge and, most importantly, results.
With late payment putting significant strain on cash flow it can be beneficial to take the necessary steps to prepare your business for the worst. Trade credit insurance safeguards cash flow from the repercussions of late payment and bad debts so that, in the event your customer enters insolvency or simply doesn’t pay, your cash flow will be protected.
Sending invoices quickly and accurately as soon as an order is fulfilled can speed up the payment process significantly. For example, if the invoice is addressed to the wrong person or place you’ll have more time to confirm the error with the customer and correct it. You can also make the process even faster and more efficient by emailing the invoice rather than posting it.
It’s vital to regularly review your sales ledger as part of the credit control process to ensure that your customers’ payment activity is always monitored and that you know precisely when an invoice will exceed its credit terms. Without this knowledge, your credit control process will lose its efficiency, punctuality and performance.
When repeat offenders are threatening your cash flow through persistent late payment it can be beneficial to implement a stop list. When you have identified poor payers, inform the business and do not provide them with any further goods or services until all sums have been settled in full. If, once you’ve been paid, you decide to continue trading with the customer, it can be worthwhile asking for an up-front payment or deposit so that you don’t find yourself in the same position again.
Whilst getting rid of customers should be a last resort, here are four reasons why implementing a stop list makes perfect business sense.
Terms and conditions
Your terms and conditions can be an excellent way of safeguarding your business in the event something untoward happens, like a customer refusing to pay. By setting expectations from the outset on what you and the customer are required to do you can limit future disputes. And, in the event something bad does happen, you’ll have solid evidence that can be produced in court if needed.
Not sure what to include in your T&Cs? This blog post looks at 12 questions you should consider answering.
Updating your cash flow forecasts regularly is an excellent way to monitor your money effectively and put plans in place to cover any unexpected cash flow gaps that you may have spotted as a result of late payment. Without a clear idea of exactly what is coming in and out of your business at all times, you won’t necessarily have the right information to make important business decisions.
It’s important to verify that your customers have received an invoice to check if there are any disputes or potential delays in payment. This can be achieved by conducting regular courtesy calls to check that you and the customer are both on the same page. By doing this you’ll give yourself time to settle any disagreements before payment is due, limiting the risk of late payment.
Not sure what to ask? This blog post explores what to cover in your courtesy calls.
Effective credit control requires dedication, persistence and ultimately a lot of hard work. You need to be consistent in your efforts because as soon as you start to slack off you’ll lose many of the benefits strong credit control processes bring. So, whilst credit management isn’t always easy, if you continually work hard you’ll reap the rewards.
Does your credit control team have the X Factor? Not everyone has the skills to successfully perform credit control and if you want to improve your chances of getting paid on time you’ll need a team that know exactly what they’re doing. So, whether you take on the task yourself as a business owner, employ a full-time employee to do it for you or you outsource the job to the experts, make sure the person responsible has the necessary skills to do the job effectively.
Arguably, the most powerful credit control tool is you. Without your dedication and commitment to improving credit control none of the other tactics we’ve mentioned mean anything. You need to believe in yourself, your business and your team and take the necessary action to tackle late payment or you’ll continue to suffer the consequences.
One of the best ways to reduce late payment is to show from the outset that you do not tolerate poor payment practices by implementing a zero-tolerance approach. This can be achieved through procedures such as charging late payment interest, taking legal action or referring the debt to a specialist commercial debt collection agency. Be sure to mention these procedures in your terms and conditions to send the right message from the very beginning.