Credit control tips

Credit Control Tips
Velin Nikolov
Bulgarian Credit Management Association
and Hilton-Baird Collection Services
Sofia, December 9, 2012

How can my business improve its
credit control procedures?

• Effective credit control is one of the most important aspects to
running a successful business. Without money coming in on time,
your business’ cash flow can be severely affected and the
associated problems can quickly get out of hand.

• What many businesses fail to realise is that the process of avoiding
the problems of late payment and bad debt begins as soon as an
order is placed - and your credit control procedures should reflect
this. It’s a vital process that starts with knowing your customers
before you sell to them and only ends once you have been paid.

Credit Control Tips: Before the Sale

1. Create a clear credit control procedure

One of the most important but frequently overlooked elements of the credit control process is the
actual process itself. By clearly setting out a day-by-day strategy from the moment the order is placed
until the invoice is paid, your accounts receivables team can adopt a coordinated and professional
credit control procedure.

For instance, businesses trading on credit terms of 30 days could adopt the following timetable once
goods have been delivered or services provided:

Day 1: Send invoice immediately
Day 14: Courtesy call to check receipt of invoice and to confirm when payment is due
Day 28: Courtesy call to check status of debt
Day 37: Send a medium impact letter explaining that payment is now overdue and that they are being
charged interest on the debt under the Late Payment of Commercial Debts
Day 43: Send a high impact letter explaining that the debt will be passed to a debt collection agency
in seven days if the debt is still unpaid
Day 50: Hand the debt over to a commercial debt collection agency (optional)


2. Know your customer
•The first step is therefore to obtain all the necessary business information, including their
full trading name, legal status, registration number, address and the key contact details of
the management and contact responsible for accounts payable. An effective way of doing
so is by sending an application form for completion, which could also detail your
business’ terms and conditions of trade.

•Using this information, it is then possible to ask a credit expert to check the credit risk
posed to your business through the extensive range of credit rating services on the
market. Online credit checks can be completed in a matter of minutes. This process is
particularly important when taking orders from larger customers, where late payment can
carry heavy consequences.

•Should their credit score be low, you can therefore demand full or partial payment up
front, decline their order, or at the very least take extra caution when performing credit
control.


3. Compile a stop list

•For persistently late paying customers, or those with a poor credit rating, it can often help
to place them on a ‘stop list’ or a ‘watch list’ to ensure diligence when selling to these
companies in the future.

•Businesses on the stop list should be informed and not supplied with any further goods
or services until all outstanding invoices have been settled at the very least, while those
on the watch list should no longer be offered credit terms without an up-front payment or
deposit, or perhaps be asked for the full amount to be paid when placing the order.

•These lists must be updated regularly and strictly adhered to when issuing credit terms
to businesses, ultimately protecting your business’ cash flow from the worst offenders.

Credit Control Tips: Ongoing

1. Assess your performance

•Always take time to analyze your business’ credit control performance and ask yourself if
the process can be made more efficient, if the team is too big or too small and how your
credit terms contrast to those of your competitors.

•Central to this process is to compare your average debtor days with the industry norm.
Look at the websites of your industry bodies and keep up to date with the news coming
out of your sector – many will run quarterly surveys that indicate the sector’s health and
the payment trends.

•Using that information, you can accurately measure how your business’ credit control
department is faring, and then take the necessary steps to ensure it’s where it should be.
These steps could be to adjust the standard credit terms you offer customers, introduce
early settlement discounts to encourage early payment of debts, renegotiate payment
terms with your suppliers, or perhaps reduce the time before you refer debts to credit
control companies.


2. Protect against late payment
•It can often be beneficial to prepare for the worst by acquiring credit protection. Credit
insurance protects a business’ cash flow from the repercussions of late payment and bad
debts by safeguarding the business from non-payment through insolvency or protracted
default, and policies can be tailored to meet your specific requirements.

•Whilst whole turnover credit insurance protects your entire debtor book from late
payment, selective cover insurance allows you to select individual invoices or debtors you
would like cover to be provided against.

•Though available as a standalone product, credit protection can also be provided
through non-recourse invoice finance facilities that additionally release up to 90% of
the invoice’s value within 24 hours of its issue to boost your cash flow. And while invoice
discounting leaves your business in charge of the credit control, factoring additionally
incorporates a dedicated sales ledger management service to remove the burden on
your resources.


3. Outsource or hire a credit controller
•Credit control ought to be an everyday business task given its importance to the success
of your business - particularly for those with a large debtor book.
•It could therefore be beneficial to hire a full-time credit controller who spends all their
time keeping the business' sales ledger updated, building rapports with your customers'
accounts departments and carrying out the basic credit control tasks.
•In addition to explaining your favoured credit control procedure and providing the
necessary training, it’s also important to listen to any ideas they may have to make the
process more efficient. Ideally the credit controller would have an extensive background
in credit management, but it can also be beneficial to employ someone with more basic
experience who you can train up to perform the tasks in the manner you know works.
•The alternative option would be to use outsourced credit control services from specialist
debt collection agencies, removing the strain on your internal resources and benefiting
from their extensive experience at credit management. This service can be completed on
a disclosed or confidential basis depending on your preference, and ensures that your
invoices are being chased by those with relevant expertise.

4. Maintain a strong relationship with your bank

Because late payment can lead to considerable cash flow challenges for your business, it
would be useful to be able to call upon your bank when your business is in need of short-
term funding to fill the cash flow gap. Whether in the form of an overdraft extension or a
cash flow loan, the likelihood of your bank manager accepting your request will often be
affected by the strength of your relationship.
It's therefore important to stay in regular contact, attend all scheduled meetings and
inform them when you are experiencing any short-term cash flow difficulties. The benefits
of such support, particularly during challenging economic circumstances such as these,
cannot be underestimated.
Likewise, exploring cash flow solutions such as invoice finance which release cash
against invoices within 24 hours of their issue can be beneficial to many businesses who
trade on credit terms.
5. Thank customers who pay on time

Finally, thank all your customers that pay on time! Not only does it show you’re grateful
for their punctuality, it is also good for customer relations and can lead to subsequent
sales.

Credit Control Tips: Beyond terms

1. Review your sales ledger

•A fundamental element of credit control is to know precisely when an invoice exceeds its
credit terms. Without this knowledge, debt recovery will not begin on time and your credit
control process will lose its efficiency and punctuality.

•It's therefore important that your accounts department or credit controllers regularly
review your sales ledger to ensure that your customers’ payment activity is always
observed.

•Credit control should be regarded as one of the business’ key tasks, and this process
should go hand-in-hand with the updating of your cash flow forecast.


2. Update cash flow forecasts

•Once it’s clear that a debt is going to exceed its credit terms, there are two things you
must consider. If the second is the best way to go about recovering that debt, the first is
of more immediate concern: your cash flow.

•Without that expected revenue coming in, the company may not have sufficient funds to
satisfy the money going out of the business to bills or suppliers, making it imperative that
you’re aware of what’s going in and out of your company at all times. By updating your
cash flow forecast, you will promptly be aware of any impending gaps in the business’
cash flow, thus allowing you to take a number of steps to ensure you don’t become the
one being chased for outstanding debts.

•The first option would be to negotiate an extension to your credit terms with suppliers. A
second would be to request earlier payment from another customer – perhaps at a
slightly discounted rate as an incentive – whilst a third would be to approach your bank to
request an extension of the business overdraft or for a short-term cash flow loan.


3. Chase as soon as credit terms are exceeded

•Once an invoice exceeds its credit terms, the pressure’s on as the likelihood of collecting the debt in
full decreases as the debt grows older. It’s therefore vital to speak to the person dealing with your
invoice immediately to ascertain why you haven’t been paid, and when they expect that you will be.
•It's important to be polite in these early stages, understanding the circumstances and explaining your
company’s procedure for the collection of outstanding debts. This could include charging interest
through the Late Payment of Commercial Debts (Interest). It may also be beneficial to send a
document that details this procedure.
•From then on it’s important to stick to your company’s pre-defined timetable for these instances, but
also to react to their position (for instance, if they’re expecting a payment from their own customer in
two days’ time, call that day). If you have several debts that are beyond terms, focus your attention on
the high risk debts (i.e. the largest or the oldest, or those with companies that are in financial trouble)
above the smaller and newer debts.
•All correspondence must be logged, detailing who you spoke to and when, as well as what was said.
This should be done throughout the entire credit control process, but it’s particularly important once
the invoice is due.
•Finally, pick up the phone. You’re much more likely to make an impact over the phone than through
letters or emails, whilst it is also easier to recognise when they are stretching the truth.


4. Don’t be afraid to take action

•Despite the fact it’s rightly yours, asking businesses for money they owe you can be a
daunting task – particularly those larger than you. Some may be valued customers whose
relations you are afraid of damaging, making it difficult to decide how forceful you should be in
your correspondence.
•What must be remembered is that, by not paying on time, they have damaged your business’
cash flow and taken advantage of the trust you afforded them by offering credit terms. On most
occasions, however, your customer wants to pay you, so you must work with them to ensure
they settle the debt quickly, and in full.
•The best tactic in most cases is therefore mediation, adopting a polite but insistent approach
that demonstrates how you value them as a customer, but also your intolerance for late
payment. By initially explaining your step-by-step policy when collecting outstanding debts, you
can create a persona of professionalism and power. Always pick up the phone to your
customer and speak to the person dealing with your invoice, reminding them of your right to
charge interest.
•Only if this approach doesn’t work should legal action be considered, beginning with a Letter
Before Action that signifies your intent to enter court proceedings if the invoice is still unpaid
after another seven days.

5. Be sceptical

•Don’t take your customers’ excuses as to why you haven’t been paid on time at face value.
More often than not, such excuses merely act as delaying tactics, so businesses should have
a procedure in place to deal with each common excuse, thus restricting their delaying power.
•For instance, if they deny ever receiving an invoice, email or fax a copy through immediately
and call to check they have received it. This excuse can be avoided completely by checking
receipt of the invoice when sent initially. Should a customer say they’ll be dealing with it
shortly, ask when and call again at the time they give you.
•The common excuse is “the cheque is in the post”. First, ask for the cheque number and the
postal date whilst checking that they have your correct company address. If cash flow is
particularly tight however, you could ask for them to pay by BACS transfer or by direct debit to
speed up the time it takes for the payment to clear.
•Debts belonging to any customers you are suspicious of, or who repeatedly come up with
excuses, should be made high priority and paid particular attention to, and in the future be
asked for full or partial payment when placing an order with you.
•Those that dispute all or part of an invoice may also be doing so to bide some time. Whether
legitimate or not however, ask them to pay the undisputed part and send a revised invoice for
the remainder before attempting to resolve the dispute.

6. Charge interest

•Under the Late Payment of Commercial Debts (Interest), which businesses are entitled to charge
interest on debts that have exceeded credit terms. An interest charge of 8% plus the Bank of Bulgaria
Base Rate (currently 0.5%) applies from the day the debt becomes overdue, whilst you are also
eligible to claim debt collection costs of at least EUR 40, depending on the invoice’s value:
EUR 40 if the debt is under EUR 999.99
EUR 70 if it’s between EUR and 9,999.99
EUR 100 if it’s over EUR 10,000
•If there is no agreed credit period, the Act sets a default period of 30 days after which interest can
run. This default period does not constitute a statutory credit period. Where no credit period is agreed
in a contract, the principal debt will still become due from the moment the goods are delivered or the
service performed. The 30-day default period starts running from the latter of the following actions:
The delivery of the goods or the performance of the service by the supplier; or
The day on which the purchaser has notice of the amount of the debt.

• A payment is late once the agreed period or the default period has expired. In the case that there is
no agreed credit period but the purchaser usually pays at the end of the month following the month in
which the invoice is received, the credit period is considered to end on the last day of the month
following the month in which the invoice is received.


7. Bring in the experts

•As debts grow older, the more difficult they become to collect. There will inevitably come
a point when you’ve tried all you can to recover the debt, making it important you make
the most of all the resources at your disposal.
•Specialist commercial debt collection agencies excel at the recovery of particularly
outstanding debts, dedicating the time and attention to each individual debtor that you
may no longer be able to afford. Knowledgeable, experienced and skilled, debt collection
companies use the right blend of understanding, sector knowledge and rigor to bring a
successful conclusion to your debt collection requirements.
•Their name alone will add further weight to your collections process, often enabling the
collections company to play ‘bad cop’ to secure payment whilst you retain your ‘good cop’
role, protecting customer relationships.
•The cost of employing debt recovery experts can be offset against the risk of losing your
money altogether, while most collection services are success-only, which means you
don’t pay unless your money is recovered. It can also be balanced against the resource
that would otherwise have to go into your own team's credit control, which could then lead
to other debts being neglected.


8. Negotiate with suppliers

•Should the business' updated cash flow forecast identify any imminent cash flow
shortages as a result of late payment, it's important to make provisions to ensure you
don’t find yourself in a similar situation to your customer. Whilst you could perhaps
request an extension to the business’ overdraft or ask other customers for early payment,
perhaps the most obvious solution would be to request temporarily longer credit terms
with your suppliers.

•Most will be understanding and let you settle the debt at a later date, particularly if you
are a loyal customer and always pay on time, but what’s vital is that you let suppliers
know as early as possible to give them the time to assess the cash flow implications an
extension would have on their business.

•If cash flow shortages are a recurring issue, it could be worth considering a longer term
funding solution to plug the gap created by trading on credit terms. Solutions such as
invoice finance release cash against the invoice value within 24 hours of issue and can
also incorporate bad debt protection and outsourced credit control, if needed.

Credit Control Tips: After the Sale

1. Invoice quickly and accurately

•It sounds obvious, but it's imperative that invoices are sent to the customer as soon as
an order is fulfilled. As some businesses won't pay until they receive the invoice, any
delays in invoicing will generally lead to delays in getting paid. The process can further be
sped up by faxing or emailing (e-invoicing) the invoice rather than sending it through the
post in order to cut costs and increase efficiency.
•Equally important is that the invoice is addressed to the right person, and that the
information it contains is 100% accurate. Any mistakes and your customer will be likely to
delay payment further still. An invoice should therefore include a detailed description of
the goods or services supplied and at what cost, a reference number, purchase order
number if required, how and where to pay and the credit terms, which must be clearly
stated.
•It is then advisable to make a courtesy call confirming receipt of the invoice, that there
are no disputes and that the customer is aware of the date on which the invoice is due.
Not only does this ensure that any issues are ironed out early on, it additionally helps to
build a rapport with your contact and demonstrates the business' professional approach
to credit control.

2. Clearly state your terms and conditions

•Always ensure that your terms and conditions of payment are clear on all
correspondence so that the customer is fully aware when payment is due and how you
expect to be paid. This includes all contracts, order confirmations and the invoices
themselves, whilst customers could also be informed about your credit terms during the
sales process.

•Invoices must be clear and easy to understand, prominently displaying your credit terms,
the actual payment date, and the acceptable payment methods and details. The simpler it
is and the easier you make it for customers to pay you, the more likely it is that you will be
paid within terms.

•You should also explain your credit control procedure in the event of late payment, from
charging interest to taking legal action or referring the debt to a specialist commercial
debt collection agency.

•By demonstrating from the outset that your business doesn't condone late payment, the
chances of getting paid within terms will be improved considerably.


3. Maintain a positive relationship
•Building a friendly and positive relationship with your customers carries several advantages.
Not only will it encourage them to purchase more goods and services from your business, it
will also improve the chances of getting paid on time - the more they like you, the less likely it
is that they'll keep you waiting.
•First, when finding out who the invoice should be addressed to, get the contact details from
that person - whether they're one of the directors or one of the members of the accounts
payable department. Second, once the invoice has been sent, make a courtesy call to confirm
receipt of the paperwork and check that there are no issues that may affect the payment's
promptness.
•In addition to providing another chance to speak to their team and identifying any disputes, it
also demonstrates your business has a strong and professional credit control process in place
that portrays experience and generates respect.
•Follow-up calls and emails to check the status of the debt at important intervals will also help
to build an impression of a friendly and proficient business, also supplying your customer with
plenty of opportunities to inform you if payment is likely to be delayed for any reason.
•It is becoming more commonplace for businesses to incentivise their sales teams only once
cash has been collected from the customer, focusing effort on building relations and reducing
disputes from the outset as there is less of a tendency to oversell. The added benefit of this
joined up approach is that the sales team buys into trading with businesses who are good
payers rather than simply chasing turnover.


4. Make it easy to get paid

•There are a number of ways to make your credit control more efficient by addressing the
methods in which customers can pay their invoices, particularly with the speed and
successes of online banking.
•Whilst cheques must be posted, take time to clear, are prone to human error and are
frequently susceptible to excuses for late payment such as 'the cheque is the post', BACS
payments increase the speed in which the money enters your account and reduces the
administrative burden on your customers.
•Methods such as direct debits and the increased use of company credit cards also make
the payment process easy. Meanwhile, standing orders can be set up for contracted
customers that pay the same amount on a monthly basis.
•The important thing is that whichever payment methods you choose to accept, your
invoices include all the information your customers require when making the payment.
This includes your business sort code and account number, your company address and
who any cheques should be made payable to.
•When trading overseas, make sure that your IBAN and BIC are included on invoices to
allow the foreign debtor to pay. Also make sure that, if you are billing in currency, you are
able to accept currency payments into your account.


5. Encourage early payment

Sometimes it can be more beneficial to your business to be paid the majority of an
invoice's value early than receiving the full amount outside of terms. Early settlement
discounts therefore provide an incentive for customers to pay up promptly, ensuring you
get the money you're owed within terms and reducing the cash flow gap between paying
suppliers and getting paid.
Although this would lead to a slightly lower profit margin, depending on the impact it has
on your credit control the discount could become part of your business' pricing structure
going forward. The discount percentage needn’t be excessive, nor apply to every
customer, just enough to encourage those that are notoriously poor at paying on time.
Typically, early settlement discounts are approximately 2.5% for customers who pay
within stated credit terms.
Again, this incentive must be clearly stated on every invoice and the figure your customer
would be saving by paying early should also be stated prominently.

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