To be effective at debt collection you need two simple ingredients - a sound credit control process and discipline in how this is implemented. Many companies have a policy, including for example offering 30 day terms for payment of invoices, but fail to act quickly when a customer doesn’t pay.
Allowing late payments will disrupt your cash flow and could harm your company's chances of success. So don’t let it happen.
To keep debtors flowing smoothly, we recommend you follow a standard procedure with set dates for follow up designed to ensure customers pay on time, every time.
Here are our suggested 6 steps for making sure you are paid.
- Check the credit status of your potential customer Use Riskdisk, Experian, Corpfin or some other similar credit checking agency to ensure that your potential customer is not already showing signs of becoming a bed debt for your business. You may also review the last filed accounts at Companies House to double check.
- Determine the credit limits So that you do not over-expose your business to a potentially large bed debt, determine what level of credit you are willing to give this potential customer and document this into your sales ledger. You may wish to increase this as your customer proves they are paying your invoices promptly.
- Get agreement to your terms of business before you accept an order or start the work Ensure that your terms of business clearly state that invoices are payable immediately and, as a courtesy, you may wish to accept 30 days credit. Ideally have your Terms of Business signed by your customer and a copy returned to you.
- Make it easy for them to pay All invoices should have your bank sort code and bank account details in the event that your customer wants to transfer money directly, rather than send a cheque.
- Design a credit control process and make one person responsible for following it Nine times out of ten this shouldn’t be the business owner or the person who made the sales that’s when discipline tends to falter with the salesman trying to keep the customer sweet for the next proposed purchase or the MD simply not managing to find time to do the necessary chasing. The process should state clearly when action is to take place and ideally include a set of standard emails or letters that can be used.
- Start chasing payment straight-away If your terms include 30 days credit make sure you follow up any non-payment before the 30th day. A phone call is always best, but use email and letters where you have to. If payment still isn’t forthcoming chase more frequently and with an increasing sense of urgency. Be courteous but direct and aim for a commitment to pay immediately.
Keeping cash flowing in a small business is one of the most difficult things to do, but a discipline of effective credit control will really help.
Chartered Accountant, Birmingham