A robust credit control strategy is a fundamental part of business success. Implementing it the right way ensures that payments are made on time. Done wrong, however, it can lead to late payment issues which can severely impact any business’s cash flow and threaten their survival.
Yet, despite understanding the need to have an effective credit control strategy, we still regularly see business owners making the same killer mistakes.
Some of the most common of those mistakes are listed below along with ways to avoid them.
Poor invoicing process
The procedure behind sending an invoice is one of the most vital steps on the road to getting paid on time. Yet many businesses overlook the importance of this step and fail to maximise its effect.
An invoice should provide a description of the product or service provided, a specific payment date, payment terms, details of all acceptable payment methods, the purchase order number, vendor references and your contact details.
This information needs to be clearly presented in a way that makes it easy for customers to know exactly how much they have to pay, when and to whom.
But perhaps the most important part of the invoicing process is after it has been produced.
It is vital that the invoice is sent as soon as your goods or services have been provided. Any delay at this stage could give your customer an excuse to stall payment.
It is also wise to call customers soon after sending the invoice to check that it has been received, providing the opportunity to verbally confirm all of the key information above and ensure that there are no disputes.
By doing this it is possible to limit the chances of hearing late payment excuses such as “I never received the invoice”, “I have a dispute” and even “I forgot”, and ensure that your cash flow is protected.
Failing to assess credit levels
Offering credit to a customer who can’t afford to pay is a sure-fire way of harming your cash flow. Yet, many businesses continue to do so because they failed to perform a credit check.
Credit reports allow businesses to instantly check a company or director’s credit rating online, enabling quick, informed decisions about who you offer credit to and how much to allow.
A low credit rating should never be ignored; always adjust your terms accordingly. It could also be worth asking for full or partial payment upfront, but at the very least you must take extra caution when offering credit to those with a poor rating.
By setting credit limits based on information gained from credit reports, the chances of customers purchasing more than they can afford can be reduced.
These steps shouldn’t just apply to new customers; it’s imperative that you continue to track credit ratings as even the most reliable customers can have a change in circumstances which would impact their ability to pay.
Inadequate late payment strategy
Once an invoice exceeds terms it begins to impact your cash flow. Without that money coming in on time you may not have the necessary funds to meet your own commitments. Therefore, it is vital that this stage of the credit control process is both efficient and effective.
Yet, some businesses fail to implement any strategy at all. Whilst to some extent approaches to different customers will vary, there should still be a clearly thought out day-by-day strategy to ensure that no vital steps are missed and the payment is collected as quickly as possible.
In the event of late payment there are many credit management strategies that you can employ, such as charging late payment interest, outsourcing the debt to a specialist debt recovery agency or taking the customer to court.
Whilst applying these tactics may seem daunting, it should be remembered that, by not paying on time, your customer has prioritised their own cash flow needs, leaving you with no option other than to take further action to protect your own position.
It is wise to reference this strategy on your invoices and terms and conditions so that customers know exactly what to expect in the event that they miss a payment. This will often be enough to encourage customers to meet all of their payments on time.
When it comes to credit control, it is important that businesses are firm but fair. Being aggressive towards customers is unnecessary and could damage relationships, whilst letting customers have the upper hand will lead to poor results and a strained cash flow.
It is vital that a strong approach is applied at all times to achieve the best results. If you apply strong credit control processes for a short period and then slacken off, you’ll lose many of the benefits.
For example, persistently late payers are unlikely to improve their behaviour if they are continuously allowed to get away with it.
These repeat offenders need a strong, consistent approach in order to cull their bad habits and stop them from resurfacing.
Placing these late paying customers on a ‘stop list’ and warning them that they will not be supplied with any further goods or services until all outstanding invoices have been settled is often enough to reinforce the fact that your business will not tolerate late payment.
Alex Hilton-Baird, Managing Director, Hilton-Baird Collection Services