Credit Management Peter Ramsden Paramount Learning
Importance of Good CreditManagement A sale is incomplete until the money is in the bank. Cash flow essential for continuance in business. Good credit and financial risk management is an essential part of everyday business.
Why credit check? Needs to be a conscious decision and not based on gut feel Protect your business If you knew the client was about to go bust or had CCJ’s or a history of late payment how would that affect your decision to extend them credit?
Minimise Risk Upfront;Good Practice Any doubt on risk of getting paid: Do a credit search Lots of external companies do credit risk searches Check invoices for accuracy: send email and by normal post. www.equifax.co.uk www.dnb.co.uk www.experian.co.uk
Ways to check creditworthiness Credit agencies Trade reference Bank reference Register of County Court Judgements (CCJ’s) Approx £4.5 per request Companies House provides accounts information Ask client to complete an application for credit form
How much credit to provide Set limits you are happy with; 1. If references are OK chose a credit limit and stick with it even if that means that you fall short of customers specified terms. Normal may be two months of projected sales with client if it is repeat business. 2. Ensure your risk portfolio is balanced. Do not have too much credit in one or more clients. 3. If transaction is one off business you need to be more judicious in setting and negotiating credit terms since you have no ongoing leverage when asking for payment.
Typical Excuses for latepayment Did not receive invoice Data on invoice incorrect – Invoice in dispute Cheque is in the post Cheque awaiting signature Product supplied is incorrect or not as specified Our payment terms are longer than on the invoice You have missed the payment run Cash flow problems; waiting payment from our debtors Invoice did not quote client order number
Risk Reduction Techniques Proforma Invoice Letter of credit COD/CAD’s Invoice Factoring Part Payment Invoice discounting Staged Payments Credit insurance Discount for early Good credit management settlement processes Prompt payment rebates Take professional advice Bank Guarantees before entering into factoring and invoice Visa and debit cards discounting Paypal
Cash Collection Make credit terms very clear Terms and conditions on reverse of invoice Open new accounts with application for credit form Issue effective invoices quickly Build relationship with accounts payable staff Check invoices for accuracy Use electronic forms of collection (BAC’s Direct Debit, Visa etc) Use late payment legislation to recover costs and interest lost