Credit control is not just about collecting overdue payments. In fact, if good credit control procedures are followed, you could significantly reduce the value of your debtor balances and the time your customers take to pay (debtor days).
Getting it right from the start
Credit control starts at the contract stage of any business relationship and should include a number of steps to assess your customers’ credit worthiness and their ability to pay within agreed terms.
This process might include formally requesting trade references, using a credit reference agency or in the case of limited companies and long-term contracts, by reviewing published accounts.
Aside from the formal process much can be gained from assessing a potential customer’s attitude towards your price and the goods or services you are offering. Take time to understand their needs and manage their expectations and to make sure that your product or service meets their requirements.
By matching the right product to the right customer at the right price you will increase the chances of a smooth transaction with timely payment.
Clear agreements in the form of contracts, terms and conditions documents and letters of engagement clarify expectations from all parties. This process can be followed, as appropriate to the product or service, with a series of documents and further communication to ensure that payment will be remitted on time.
All too often debtors only come to the attention of a business owner or director when the account becomes overdue, at a point when the customer cannot or will not pay.
Make maintenance a priority
Once the project or delivery is underway it’s important to maintain contact with the customer and any subcontractors to ensure the obligations and expectations are being met. Any deviation from the contract should be discussed and problems resolved before the customer becomes dissatisfied and starts to delay or withhold payment.
The debtors ledger should be reviewed regularly. A good place to start is the Aged Debtors Report, although some managers prefer a less cluttered list of unpaid invoices available from most bookkeeping software.
Regularly calculating debtor days – the average number of days between invoice date and payment date – will reveal trends and help to improve targets for payment collection.
Keep diary notes on any conversations or correspondence with debtors. This historical record will help credit control staff to assess individual matters and to follow up on promises to pay.
Remember that a sale is not a sale until your customer has paid, and you might need to consider suspending work with customers whose accounts are overdue without an agreed reason.
Communicating with your debtors on a regular basis will help to ensure that your customer is happy with the way a project is progressing and payment of your account is given due consideration. If possible a telephone conversation or face-to-face meeting is best - you can learn far more about your customers’ circumstances and attitude than you would in an email.
Make sure your customer understands your credit terms. Sometimes payment can be delayed because a customer is unaware of the requirement to pay. Always send your invoices on time, and if appropriate follow up with a monthly statement of your account.
When working with larger organisations the person you deal with at the sales stage may not be involved in the payment process. Find out where you should send your invoices and make contact with the person or department who will be responsible for processing and paying your invoice.
Gain an understanding of the authorisation methods and find out if there are cut-off dates by which you need to submit your invoice. If at any time you think your invoice might have gone astray or payment is unexpectedly late call the accounts department and follow up any delays.
Time well spent
A credit control procedure which includes agreement to payment terms and checking creditworthiness will take a little time to put in place, but the long-term benefits will far outweigh the time spent.
Time taken to ensure agreed payment terms are met will decrease debtor days help to achieve a satisfactory outcome for all parties.
Communication at all stages will highlight problems early and help to minimise the risk to your business.
We would like to thank Sheelagh Lyons for writing this article. Sheelagh runs Bookkeeping Clarity which delivers a bespoke training, guidance and support service to business owners and their staff to improve their bookkeeping and accounting capability. Over the last 30 years, Sheelagh has trained many business owners and accounting teams to develop their bookkeeping skills and utilise their software to produce meaningful information; enabling them to become more efficient and achieve greater financial control.