Every year, startups and small businesses in the United Kingdom face the risk of failure due to cash flow challenges. Among the leading causes of these issues are slow-paying customers and bad debt. To safeguard your business’s growth prospects, it is imperative to establish an effective credit control process.
Understanding Credit Control:
Credit control plays a pivotal role in ensuring the financial health of a business. It involves the systematic management of accounts receivable, ensuring prompt payment of customer invoices. This proactive approach encompasses monitoring payment timelines, addressing late payments, and implementing strategies to optimize cash flow. A robust credit control process is essential for maintaining financial stability, securing liquidity, and fostering sustainable growth. It serves as a financial guide, steering businesses clear of cash flow pitfalls and empowering them to thrive in a competitive market.
Why Credit Control Matters:
Cash flow serves as the lifeblood of any business. Without it, a company cannot meet its financial obligations, invest in new ventures, or expand its workforce. Credit control is pivotal in maintaining financial stability and enabling steady growth. It entails vigilant management of money owed for products or services not yet paid for. By proactively managing these accounts and taking swift action against late or missing payments, businesses can enhance cash flow and avert financial crises. This proactive credit control approach helps companies stay financially secure, meet their financial commitments, seize growth opportunities, and navigate unforeseen challenges.
To assist you in improving your credit control policies and procedures, we present these ten key considerations:
Establish a Clear Credit Control Process:
Implementing a well-defined and coordinated credit control procedure is crucial. Timely reminders can prevent late payments, reducing the risk of bad debt. Create a timeline that encompasses all necessary steps, involving various team members in your organization. Set credit terms based on supplier payment requirements and outline stages for chasing payments.
Research Customer Credit Management:
Enhance your credit control process by researching your customers before extending credit. Identify high-risk clients and focus your research efforts on them to offset costs. Obtain vital business information, such as trading names, registration numbers, addresses, and contact details, to assess credit risk.
Foster Positive Client Relationships:
Build positive relationships and maintain open lines of communication with clients to ensure effective credit control. Make courtesy calls to confirm paperwork receipt or discuss upcoming invoice due dates. This approach not only projects professionalism but also provides clients with opportunities to explain their situations.
Invoice Timely and Accurately:
Improve credit control procedures by promptly and accurately issuing invoices. Send invoices as soon as orders are fulfilled, preferably via email. Ensure invoices are addressed correctly and contain no errors. Confirm receipt of invoices to proactively address potential issues.
Encourage Early Payments:
Facilitate early payments by making it easy for customers to settle invoices. Clearly state banking details on invoices and accept various payment methods, especially online payments. Consider offering early settlement discounts to incentivize timely payments.
Compile a Watch List and Take Action:
Maintain a watch list of customers with a history of late payments. Monitor their activities and consider requiring a deposit before extending credit. Take action against persistent late payers, such as sending solicitor’s letters.
Forecast Cash Flow:
While not foolproof, cash flow forecasting provides a rough estimate of expected revenue and debt obligations. Regularly update your cash flow projections to avoid surprises and address issues proactively.
Trust Your Business Instinct:
Question customer excuses for late payments and request documentation when possible. Don’t hesitate to follow up on delays and prioritize clients with a history of late payments.
Simplify Payment Methods:
Offer customers various payment options, such as cheques, BACS, credit/debit cards, or cash, to combat common excuses like ‘the cheque is in the post.’
Maintain Clear and Consistent Terms:
Clearly define and communicate your terms and conditions to customers, especially new ones. Ensure they understand late payment policies and potential actions. Consistency in enforcing terms fosters positive customer relationships.
Consider using technology to streamline your credit control efforts. Various tools can provide credit rating information, automate credit control emails, and offer valuable insights for decision-making.
Additional Tip: Utilise Unpaid Invoices as Credit:
Convert unpaid invoices into working capital through invoice finance. This approach improves daily cash flow management, minimizes reliance on suppliers, and offers advances on payments already due.
SMEs and Late Payments:
Late payments significantly impact small and medium-sized enterprises (SMEs) in the UK. A recent report from the Federation of Small Businesses (FSB) highlights the challenges SMEs face due to late payments. To address this issue, the FSB advocates for measures to hold larger businesses accountable for their payment practices and create a level playing field for smaller firms.
The Department for Business and Trade (DBT) is conducting a prompt payment and cash flow review to support SMEs facing payment difficulties. The report underscores the need for reforms in late payment practices to alleviate the burden on SMEs and align public perception with actual payment timelines.