SMALLER BUSINESSES SHOULD BE CRYSTAL CLEAR ABOUT THEIR CREDIT TERMS, MONITOR COMPLIANCE AND DON’T LET LATE PAYMENTS DRIFT…
By Dave Hickey F.C.A.
Any owner or leader of a small or medium business will confirm that providing a product or service to a customer and getting paid for it are two different things.
Economic uncertainty as well as business costs are increasing, and this can put additional pressure on cashflow for any organisation. Customers may have their own cashflow challenges or they may simply be more cautious in making payments. Whatever the reason, there is growing evidence that businesses are taking a little longer to settle their accounts and bad debts are slowly increasing.
It is uncomfortable to have to chase payments from customers particularly if you have spent time building a good relationship with them. Many business owners find it awkward to request payment but they need find ways to get over the embarrassment (or better still avoid it altogether) and get the money they’re owed into their bank.
Below we look at a few steps that business owners and leaders can take to avoid or reduce credit control problems.
MANAGE CREDIT – GET PAID!
- Possibly the most important advice about managing debtors for business is to avoid providing credit at all, if possible. Only give credit if it helps your business sell more.
- If you have to provide credit then make sure the terms are crystal clear, agreed in advance and work for your business. If necessary, speak to your customer to make sure they understand and agree to the terms. For example, if you offer 30 days credit, make it clear whether it is from the invoice date or ‘end-of-month’ and, crucially, make sure your customer understands this! Remember that ’30 days end-of-month’ means that if you sell a product on the 1st March, payment is not due until 30th April, effectively 60 days’ credit!
- Don’t be shy about asking for a portion of the payment upfront. It’s common in service businesses to ask for up to 50% on agreeing the sale. You may not get what you ask for, but it should reinforce in the customer’s mind the need to settle promptly.
- With larger customers, it can really help if you try understand their payment processes so that you can help navigate your invoices to the top of the pile for payment. Larger organisations can be slower to pay invoices, not to deliberately slow payments (although this can be a reason) but because they have systems and processes which take longer to complete a transaction. If they have an accounts payable person or section, build a good relationship with them, if possible.
- Get the detail right. Make sure your invoices are accurate in every detail not just the service/product and cost. Check if it needs a Purchase Order number or it needs to be coded to a particular person, location or department. This is even more important when dealing with larger customers.
- Don’t wait for payment to become a problem. For larger amounts, you could schedule a call with the customer to see if there are any potential issues with payment.
- Measure and monitor frequently. Set targets for DSO (Days Sales Outstanding) and review progress at least monthly, ideally weekly. Make sure you have updated aged debtors’ reports available for credit control and sales teams every day. Sales teams need to know when to stop making sales to customers who have breached their credit terms.
- Perform due diligence on new customers. If a customer you know has been dealing with one of your competitors, suddenly comes to you with a large order be very sure it’s not because they have been refused credit elsewhere.
In an ideal world we would all get paid immediately we delivered goods or a service. But most businesses don’t work like that, so managing credit effectively is an important part of most businesses.
Some organisations are large enough to have a function to do this for them, most have to rely on owners, sales and/or finance to do this. However it’s done, being crystal clear on the credit terms and communicating effectively as a team and with customers is key to success.
For further reading see our post on managing current assets here.