Essential tips for credit control

Credit control can be described as the process of ensuring customers pay their invoices on time, and the system in place to resolve the issue if they don’t. Cash flow has been covered in another chapter of this book. Credit control is a vital part of controlling that cash flow.

Despite this, credit control is an area often neglected and given little priority. Business owners and managers can get tunnel vision with their primary focus being on generating sales. While this is an important aspect of any business, it can be at the expense of ensuring that the funds generated from those sales are received in a timely manner.

It’s important for businesses to have a good credit control system in place and not rely on the goodwill of their customers, assuming they’ll pay within a reasonable time frame. What is reasonable to a customer might not be reasonable to you, as a business owner.

It may sound obvious, but the first step to implementing any credit control system is to decide on payment terms. An invoice can’t be identified as late for payment unless the due date was known in the first place. Within 30 days of the invoice date is common. However, when deciding on payment terms for your business, it’s very much up to you and could include payment on receipt of invoice and up-front or staged payments.

You don’t have to take a blanket approach and terms can differ from customer to customer. In some cases, a customer may have their own supplier payment terms which differ from your terms. If there is no room for negotiation, you’ll either need to accept their terms or decline their custom.

It’s also worth considering whether to offer an early payment discount to encourage customers to settle invoices sooner rather than later. For example, a 5% discount if the invoice is settled in full within 14 days. Before offering early payment discounts, make sure the business can afford it and consider if it’s worth forgoing this extra income to assist with cash flow.

As well as setting payment terms, it’s important to decide on credit limits, which again may differ between customers. A credit limit is the maximum amount a customer is permitted to owe your business. If they reach their credit limit and want to continue to trade with you, they need to make a payment towards the outstanding balance or renegotiate their credit limit. You may consider giving them a temporary increase if there is a specific reason why they have breached their limit and it’s unlikely to reoccur.

When deciding on credit limits, consider this question – could my business survive if the customer doesn’t pay? It’s not uncommon for a business to collapse because a customer who owes them money goes bust, with no way of paying its creditors. The higher the credit given to customers, the more reliant your own business is on their survival.

Once payment terms and credit limits have been set, they need to be communicated clearly to customers. Don’t rely on doing this verbally. If an issue arises, it’s your word against theirs. If a customer has genuinely misunderstood the terms, this is likely to create bad feeling with a potentially good customer, so always put payment terms in writing.

On this note, don’t try to hide terms or bury them amongst other text as if you’re ashamed of them. Be open and honest and state your business’s terms clearly from the beginning. This way, you and your customer both know exactly where you stand and there is very limited scope for confusion or misunderstanding.

If new customers are required to sign a contract with your business, include your credit terms in that contract. Payment terms should also always be clearly stated on each invoice and made clear when a customer places their first order.

Agreeing payment terms with your customers is very important but, if there is no system in place to monitor whether they are being adhered to, then the whole credit control process is being undermined.

This is one of the reasons why it’s important to have good quality accounts software in place which is regularly kept up to date and operated by someone with the necessary expertise.

Unfortunately, many business owners see the financial record-keeping side of their business as a necessary evil that they don’t want to devote much time or money to because it doesn’t add anything to their business. This couldn’t be further from the truth. A good accounting package used properly is an invaluable tool for continually monitoring the performance of a business and vital in keeping on top of credit control. At the click of a button, the software will produce a report stating exactly how much each customer owes, the amount which is overdue and a breakdown of the individual invoices which make up that overdue amount.

Many accounts packages can also send automatic reminders or statements to customers with overdue invoices. This is a great feature. However, it doesn’t mean you can take your eye off the ball. Just because a customer gets a reminder, they aren’t necessarily going to spring into action and pay, so you can’t leave it all up to the system.

If a customer doesn’t pay, then the debt needs to be chased. Don’t be scared to do this or feel afraid that you might offend your customer. If they have agreed to your payment terms but aren’t abiding by them, then you have every right to contact them and chase payment. This could be in the form of a statement, email or a phone call.

The saying “he who shouts loudest” is quite relevant here. Even customers with the best intentions of paying on time may suffer cash flow issues themselves. If they have limited funds to pay their suppliers, who are they going to pay first? Those who are actively chasing and are going to continue to do so, or those in the background too afraid to speak up?

Although you should be assertive regarding overdue payments, don’t go at it like a bull in a china shop. If your customer is experiencing cash flow difficulties, it’s better to negotiate a payment plan than end up in an argument and lose the customer altogether.

However, when you chase late payments, it’s important to have a fixed process in place which is applied consistently. An example of this might be as follows:

  • As soon as a payment becomes overdue, send a statement
  • If the payment is still outstanding after 14 days, send an email reminder
  • If after 30 days, the payment is still outstanding, then phone the customer directly

If your customer is another business, then you’re entitled to charge interest on overdue amounts. There is a statutory interest rate set down under the Late Payment of Commercial Debts (Interest) Act 1988, of 8% plus the Bank of England base rate. If your costs are higher (for example if you’re using a debt recovery agency), you can claim “reasonable” recovery costs. Letting your customers know you’re aware of the Late Payment Act shows that you’re on the ball when it comes to overdue debts and gives you a tool to use as leverage. For example, you could write to your customer stating that, although you’re entitled to charge interest and compensation, if they settle the overdue amount in the next seven days then you’ll waive this right.

If, despite all your efforts the customer is still not paying up, then there is the option of taking legal action. This could be through the small claims court, a solicitor or a reputable debt collection agency. However, if you want to continue to trade with the customer, you need to consider the damage of taking legal action on your relationship with them. Along with the cost and time involved, this normally makes legal action a last resort.

No business likes to turn custom away, but if you’re regularly struggling to get particular customers to pay within a reasonable period, then consider whether you really want to continue to deal with them. The time you spend chasing payments could potentially be better spent elsewhere, such as finding new customers who will pay on time.

A part of credit control is also knowing when to give up. There may be times, particularly with smaller debts, when it’s just not worth the time and potential cost of continuing to chase the debt. Frustrating as it’s not to be paid for work you have done or products you have supplied, sometimes you have to take it on the chin, write it off and move on.

Paul Marks
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Paul Marks

Paul is a Fellow of the Association of Chartered Certified Accountants completing his professional examinations in 1996. He specialises in onsite services for our clients in particular management accounts preparation, accounts software implementation and training, VAT returns and general business advice.