Create an effective credit control process for your business

Karen Buttrey, finance director at chartered accountants Price Bailey, outlines the steps businesses can take to create effective credit control procedures and mitigate the risk of negative cash flow as a result of outstanding invoice payments.

UK businesses are at the centre of an unsustainable culture of late payments. Prior to the pandemic, late payments caused 50,000 SMEs to fail each year.

Now, there is an increased fear that even more businesses will continue to fall as a result of the catalyst that was the pandemic and the increased costs our economy is facing.

As many companies begin to find a new normal, they may also find their growth plans impeded by the lack of cash flow caused by late payments from debtors.

Often, late payments can easily be rectified with an effective and clear credit control function. It is vital that businesses have in place, and follow, a realistic timetable for recovering delayed payments to prevent the money from becoming uncollectable.

Here are key steps you can follow to recover late payments from debtors, and that you can place in a timeline to suit your business and your own credit terms with creditors.

1. Communicate payment terms clearly

Explain your payment terms and conditions with your customers from the start of your relationship.

You may wish to send out a written copy of your terms and conditions of sale upon order confirmation.

For online sales, ensure you have your terms and conditions of sale document available to read online before a sale is completed.

2. Invoice when goods are delivered

Invoicing on time increases your chance of getting paid quickly and before your client’s financial position changes. If your goods are delivered by post, you could consider also invoicing via email to support this.

You must ensure your invoices are accurate and easy to read. List what you are charging for, make sure you include agreed fees, include a payment date, and submit it to the person who will be paying the invoice – sometimes the person paying is not the person who bought your goods or services.

Offer different payment methods to your clients too, whether that be debit/credit cards, bank transfers, mobile payment such as PayPal, or cheques.

3. Remind your clients their invoice is due

A proactive approach is often always better than a reactive approach. In this case, you may wish to offer a polite reminder to your customer that their invoice is due in 7 days, and then again 3 days prior to the invoice being due if they have not paid it already. Resolve any queries raised on invoices as soon as possible, do not ignore them.

4. Follow up the invoice immediately after the payment term is up

As soon as your customer exceeds the invoice due date, the average invoice date being 30 days, make sure you follow it up immediately.

Remain polite, but be persistent. Demonstrate active listening, and bear in mind their reasons for paying late to ensure that they still feel respected. Once you are sure your debtor is being honest with you as to why they are paying late, then make sure you get a commitment from them (a firm date and payment amount) as to when they will repay the debt.

Automate your credit control chasing

Over a third of businesses (32%) spend up to 75% of their time chasing overdue debts, valuable time that can be substantially reduced if they make use of certain software or outsourcing.

Briefly, some benefits of automating your credit control function include:

maximising your cash flow,

reducing the need for bank borrowing,

improving internal credit management procedures, and

reducing bad debts.

5. Ensure you have a debt recovery procedure in place

You may choose to provide your debtor with choices that suit them regarding the payment of the money, for example;

Is it possible to spread the payments out over a longer duration to make the unsettled debt more manageable?

What possibilities do your Terms and Conditions of Trade provide? Could you give them longer periods for a fee or an agreed-upon interest rate?

Is there anything else at play that needs to be considered? For example, there could be a serious dispute regarding the validity of your invoice, or they could potentially be facing insolvency.

Assuming there are no bigger factors at play, some options available to you to recover the debt include;

STOP providing goods and/or services if payment is not forthcoming.

Informally try to resolve the matter through, for example, negotiation and/or mediation.

Threaten to commence Court proceedings. Remember you must follow through with this action though.

Threaten to commence/commence insolvency proceedings.

Do nothing – write off the debt.

Rarely, is writing off the debt the best solution.

Tailor your processes to different debtors

If you have the capacity and the resources, tailoring your credit control procedures to different debtors will give them flexibility in paying the money you are owed. This can be particularly important if you have a close business relationship with a client and do not wish to jeopardise this.

To tailor your approach, you may consider:

bearing in mind their reasons for paying late to ensure they still feel respected,

determining if payments can be spread across a period of time agreed by both parties,

offering extended terms at an agreed interest rate, or

offering early settlement discounts.

By consistently following and applying these steps, you will see a real improvement in the effectiveness of your credit control procedures. Remember to regularly monitor and review your credit control processes to ensure they are still effective in encouraging your debtors to pay on time.

If your credit control procedures are still not delivering the results you would expect, consider consulting an expert who can review your existing credit control function, and identify possible efficiencies and improvements.

More information at Price Bailey.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

Previous articleNew social investment fund to tackle inequality
Next article£500m Fund launched for businesses in Cambridge and Suffolk