Everyone loves a sale. That buzz you get when the deal is done. It doesn’t matter how long you have been in business, the thought of someone wanting to buy your product or service is a great one. But the transaction doesn’t end with the sale, or even the delivery, it ends once the customer has paid.
So many businesses struggle when they become starved of cash, and yet on paper they look profitable. One of the reasons why they are profitable, yet short on cash is that the customer has yet to pay for the sales that have been reported. Worst case scenario is that you have paid all your staff, and your suppliers, for what was needed to supply your customer. In this instance you have a very negative working capital cycle.
In this article we will explore some basic steps in ensuring you are making sure your cash stays as positive as possible through implementing some control – Credit Control.
Step 1 – Only give a credit account when you are comfortable with dealing with the customer
Some industries operate on a cash only basis, or cash on completion or delivery. This type of trading is acceptable to the customer and is expected as part of the process of buying. However, if you work in an industry that normally offers credit, make sure you are confident about who you are extending credit to.
It is normal practice to insist on proforma payment for new customers, and you might chose to keep this in place for the first few orders. If you plan to offer credit make sure that you have done some background checks on the customer’s business. A number of companies offer access to credit information to help guide you in this area.
You don’t have to extend full terms straight away. You can also stagger them as your relationship develops with the customer. If you started with a proforma approach, you can move to payment on delivery, 7 days, 14 days etc before moving to your full terms. You can also fix a credit limit that you fill comfortable with. Again by restricting this value, your customer may need to settle their account before the terms in order to keep below the limit. The most important thing to remember is that you are taking the risk, so only set terms and credit limits to levels you are comfortable with.
Step 2 – Keep your invoicing up to date
Make sure you keep up to date with your invoicing. A customer will only settle an invoice once it has been received. The longer you leave your invoicing, the longer you will have to wait for payments. Try and invoice as close to the delivery of goods or service as possible.
Make sure you also have all the correct information on the invoice. Inaccuracies with the customer’s name, address, contact details could cause delays with payment. Some companies insist on a purchase order being on the invoice for matching purposes. Check with your customer if this is required, and make sure you get a purchase order number to work with if needed. Accounts departments tend to be black and white, so if your invoice can not be processed without questioning, it is very likely it will be delayed.
Step 3 – Understand your customers payment process
Make sure you have a good understanding of the accounts payment process your customers operate under. Not many companies pay invoices “date of invoice” ie 30 days after the invoice date. Most operate on “End of month following” which means they collect all the invoices due in the month and pay them all in one large payment run. Many have monthly payment runs at the end of the month or the first week of the month or the middle of the month.
One big word of advice is watch large corporate organisations. In the current climate it is now becoming common for larger companies to impose their own terms on business transactions, even though it is you selling to them. Do not assume that you are in complete control of this process, and make sure you are very clear about this with them before you start any commitment to trade. It will be a nasty surprise if later down the line you find that they only pay their suppliers on 90 or 120 days, and this could cripple your cashflow very quickly.
Step 4 – Have a strict routine of reminding your customers for payment
Even if you are a small business, it pays to have a strict routine when reminding your customer of outstanding payments. Sending statements at the end of the month is a good way to remind your customer of outstanding invoices, and which ones are due.
You can follow this up with a series of chasing, overdue letters , as payment becomes late. Set up some simple templates of chasing letters that increase in firmness for the different letters. You can then send these as time periods pass, and payment is still not received. If necessary send them recorded delivery to keep a record they have been received.
Dedicate a fixed time a month to follow up with your outstanding amounts. A good time to do this is part way through the month. Your customer will have received their latest statement, and processed all their monthly invoices ready for their monthly payment runs. Make sure you establish contact with them before their payment run so that you can make sure your invoices are on it.
Step 5 – Keep in regular contract with your customers
The worst thing you can do with your customer after delivering your product or service is to stop talking to them. Don’t always assume that they are mindful of any outstanding balances with you, remember, they are probably running their own business with their own challenges.
Keep in regular contact with them after delivery. You can do this in several ways, including following up with them to make sure that the product or service your delivered met their needs. Apart from being good customer service, it is also a way of making sure there are no problems which could cause delays to payment further down the line.
If your customer’s payment is overdue, don’t assume that they are on top of their admin and that the invoice is ready to be paid. Likewise don’t jump to the conclusion that they are in trouble and about to go under. If payment is overdue and you’ve sent gentle reminders, pick up the phone and speak to them. You might find that they have forgot, or if they are in difficulty you can start a process of dialogue at an early stage.
If your customer starts to ignore your calls and correspondence, make sure you start to document your attempts to contact them, so that when you speak to them you can remind them of the attempts you have made to bring the situation to their attention. It is best to use a combination of calls and letters, so that there is a clear trial of your correspondence. Also make sure you document any commitments the customer makes in terms of payment or problems.
Step 6 – Work with your Customer to bring their account up to date
If you manage to establish contact with your customer and they are struggling to settle their account, take a step back and consider the relationship you have with them and the value of their custom to your business.
If the customer has made a one off purchase and you are unlikely to trade with them again, you could chose to be more assertive with them in insisting on payment by return. If they still don’t settle their account you could then chose to pursue the debt with additional help from other agencies, which has been covered in the next point. Alternatively, if you feel that you would like to continue to trade with the customer you can take a number of approaches to keep the trade going, but secure your payment.
One option is to restrict further trade until such time as their account is brought up to date, traditionally called “being put on hold”. Once their account is brought up to date, they can then continue trading as before.
If there is a real need for them to continue trading with you, and you are comfortable to do so, you may chose to implement a payment plan to pay off the outstanding amounts. This could be a fix sum every month or a percentage of future purchases. The key thing is to make sure you manage the level of risk to yourself and that you are comfortable with the proposal. If the customer starts to slip outside the conditions, make sure you revisit the proposal, and if necessary stop trading until the matter is resolved. Sometimes this approach can really strengthen the relationship with your customer, especially if you can help them trade through a difficult patch.
Step 7 – Seek help
After a period of time you may have exhausted all communications to the customer to bring any outstanding amount to their attention. You may be in a frustrating position of not being able to establish contact with the customer, or have been promised payment that has not arrived. At this point you need to seek further help.
There are a number of options open to you with regards to pursuing the debt, and there are lots of agencies that are set up to assist you in this process. Having a well structured approach to your credit control and a good audit trail of your communication with the customer, will help them with helping you.
Once you get to this point the costs of recovering the debt will increase, as will the likelihood of you not recovering the full amount, however, it is worth exploring if you feel that you are not making progress. Sometimes these agencies are able to support you much earlier in the process, and some offer a full credit control service to manage everything for you.
Step 8 – It is your business
What is most important when offering credit to customers is that you set your stall out at the beginning of the process, and you communicate in clear terms with your customer. Only commit to giving the level of credit that you feel comfortable with, and probably most important, don’t feel bullied into giving large amounts of credit to secure new business. Most companies accept that credit needs to be build up with trust.
If you don’t feel comfortable lending to a customer, then don’t. Remember, profit is Queen and cash is King, but you are the master of all.