The Octempo:RM Blog

Get on the phone and talk to your customers. OK so that wouldn't make a very interesting or extensive blog post but it's the simple truth. Good credit control is about using the phone and following up invoices before they fall due for payment. Let me explain.

Scenario 1 - a business invests in some great software. It automatically emails statements and sends reminder letters. Requires a lot of set up and maintenance from the business. They sit back and expect collections to improve and debtors to reduce. They don't. Letters and emails can easily be ignored and the recipient feels no shame in doing so. After all they probably get 100 emails a day

Scenario 2 - a business engages someone to do follow up calls and build a relationship with the Finance contact at the customer. Need to get the right person with the right personality to be comfortable chasing for cash but not too agressive. Calls don't get ignored, particularly if they know you will always ring until you get connected. Makes ure you get the right person to speak to though. We often come across credit controllers who are afraid of the phone....so be careful. Couple of months in with this new calling regime and debtors are reducing and cash flow looks healthier all round

You also need to make sure you get the right metrics to measure the performance of your credit control. At the very least you should be looking at a cash flow forecast based on expected payment dates. Each week you should review an analysis of older debt and ensure actions are in place to fix. Set targets for aged debt e.g. nothing over 60 days overdue. Look at the average days it takes your customer to pay and track the trend which should be going down.

Lastly the speed with which you resolve queries and fix invoicing problems is the biggest single contributor to successful credit control and prompt payment. Monitor your queries, fix the problems giving rise to them so you can avoid in the future, and ensure that all queries are resolved quickly. No queries = more cash in the bank 

Sales people want to sell - after all is what they are paid to do and what they get commissioned against. Finance people are paid to bring control to a business. Not being paid for the sale you make is a pointless waste of effort and costs the business real cash. Finding the happy middle ground is the key to success and this is where your credit policy comes in.

What is it? A good credit control policy defines the process for taking on new customers, how their credit limit is set and what happens if they pay late.

What isn't it? A bat to beat sales people about the head with and hide behind taking any risk. If you grow sales you extend credit you take a risk - a good credit control policy helps you manage that risk

What should it contain? That depends on your business but here's some free credit control advice:

- introduction - what is the credit control policy meant to do

- risk management - outline how and when and why you credit risk assess customers. Who authorises credit limits? Distinguish between new and existing customers. Who makes the sales people aware of limits?

- credit control invoice chasing process. What happens with late invoice payments? When do customers go on stop and what communication takes place

- overdue balances - what is the sequence of phone calls and letters to the customer. When do you use a debt collection agency?

For those who follow our blog we are happy to send a free credit control policy template - just ask for a copy at info@octempo.com

Prevention is the best cure when it comes to potential bad debts. Every time you decide to sell to a customer on credit - and let's face it you generally don't have much choice if you want to grow your business - then you introduce an element of risk.

Risk in a business is normal. It's why you can make a profit. But is does need to be managed. This is the first in a series of weekly blogs that looks at the tools available to manage the risks of extending credit to customers. First up are credit risk reports.

Credit risk reports are a way of understanding the creditworthiness of potential customers. You can buy different types of reports that contain different levels of detail and data - the more detail the higher the cost. They do carry a major health warning in that the informatiion is historic and the fortunes of a business can change quickly. It's better than nothing though and the important thing to look out for are the trends. A good credit control review would look at:

- sales - are they growing?

- if growing, are they overextending the business leading to a squeeze on cash?

- look at cash and liquidity ratios? Is there cash in the business? Are current liabilities greater than current assdets? What are the trends

- are there any County Court Judgements? Are there reports of slow payment?

- if the business is shrinking, why is this? Ask the question of the customer?

- are they shedding staff? Why

- how big a part of your turnover will this customer represent?

The above list provides a flavour and is not exhaustive. The credit report also provides two key financial numbers - working capital and net worth. As a benchmark for a new customer keep their credit limit to within 10% of their net worth. A Google search can also reveal some interesting information....and it's free so a useful addition to the credit risk report.

A further word of caution though. If you are not comfortable with what you are looking at get someone to help. Extending credit when you do not understand the risk is not a sensible approach and will increase the chances of late or non-payment. 

Next week we will look at credit policies.

If you run a business and extend credit you always have the risk that a customer doesn’t pay you. You manage this risk through good credit control but sometimes even then you can still be hit by a bad debt. We had a client recently who came to us because a customer had gone into administration. Whilst we were happy to offer free advice on how to proceed, one call to the administrator confirmed it was a lost cause. 

This was not a big debt - £1800 - and it happens. The interesting point though is how the debt grew. The client had a reasonable credit control policy but decided in this case not to follow it. A couple of months went by and the debt grew and what was £600 per month on an invoice became £1800. The client had not been disciplined or aggressive enough. Service should have been withdrawn earlier and at least then the exposure would have been limited. 

We always recommend that a business reviews its aged debtors weekly and then takes action to remedy. The current economic environment makes this even more necessary. This is good credit control and ensures constant monitoring. Neglect and a lack of discipline are every slow payers dream. Don’t let bad debt happen to your business.

I met a guy last night who had lost his business due to a customer refusing to pay. Total debt amounted to £300k and all through the job he had been promised payment and re-assured. There was a strong and warm personal relationship but as soon as the job was finished the customer changed stance and refused to pay. This bad debt took an otherwise sound business under.

What can we learn from this? Hindsight is a wonderful thing and whilst this may look like a failure of trust it is actually a failure of objective and professional credit control. So what could have been done differently:

- the work was over a period of time so staged payments would have helped

- divorce trust from objective reality. No payment after repeated requests = guys pulled off job. This is leverage

- clear credit control escalation policy for late invoice payment

And the worst part? The debtor has plenty of cash and can pay - just doesn't want to. It's going through the courts now and will no doubt be tied up in red tape for a couple of years.

Remember - asking to be paid on time is not a favour, it's professional business practice. If you are uncomfortable completing the credit control in your business get someone in to help you. It's too important to neglect.