Once your partners, accountants and senior management have agreed the timetable, the next task is to introduce it to the accounts department and ensure that the necessary levels of training are provided so that all stages are adequately completed and meticulously stuck to. Stages can range from invoicing the day the order is fulfilled and courtesy calls or letters that politely, but firmly, remind the customer of their obligation to pay you. Should the invoice not be paid after a certain time, it may be beneficial to pass the debt over to a specialist commercial debt collection agency.
Credit control tips
Credit Control TipsVelin NikolovBulgarian Credit Management Associationand Hilton-Baird Collection ServicesSofia, 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 procedureOne of the most important but frequently overlooked elements of the credit control process is theactual process itself. By clearly setting out a day-by-day strategy from the moment the order is placeduntil the invoice is paid, your accounts receivables team can adopt a coordinated and professionalcredit control procedure.For instance, businesses trading on credit terms of 30 days could adopt the following timetable oncegoods have been delivered or services provided:Day 1: Send invoice immediatelyDay 14: Courtesy call to check receipt of invoice and to confirm when payment is dueDay 28: Courtesy call to check status of debtDay 37: Send a medium impact letter explaining that payment is now overdue and that they are beingcharged interest on the debt under the Late Payment of Commercial DebtsDay 43: Send a high impact letter explaining that the debt will be passed to a debt collection agencyin seven days if the debt is still unpaidDay 50: Hand the debt over to a commercial debt collection agency (optional)
Credit Control Tips: Before the Sale 2. Know your customer•The first step is therefore to obtain all the necessary business information, including theirfull trading name, legal status, registration number, address and the key contact details ofthe management and contact responsible for accounts payable. An effective way of doingso is by sending an application form for completion, which could also detail yourbusiness’ terms and conditions of trade.•Using this information, it is then possible to ask a credit expert to check the credit riskposed to your business through the extensive range of credit rating services on themarket. Online credit checks can be completed in a matter of minutes. This process isparticularly important when taking orders from larger customers, where late payment cancarry heavy consequences.•Should their credit score be low, you can therefore demand full or partial payment upfront, decline their order, or at the very least take extra caution when performing creditcontrol.
Credit Control Tips: Before the Sale 3. Compile a stop list•For persistently late paying customers, or those with a poor credit rating, it can often helpto place them on a ‘stop list’ or a ‘watch list’ to ensure diligence when selling to thesecompanies in the future.•Businesses on the stop list should be informed and not supplied with any further goodsor services until all outstanding invoices have been settled at the very least, while thoseon the watch list should no longer be offered credit terms without an up-front payment ordeposit, 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 termsto 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 ifthe process can be made more efficient, if the team is too big or too small and how yourcredit 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 comingout of your sector – many will run quarterly surveys that indicate the sector’s health andthe payment trends.•Using that information, you can accurately measure how your business’ credit controldepartment 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, introduceearly settlement discounts to encourage early payment of debts, renegotiate paymentterms with your suppliers, or perhaps reduce the time before you refer debts to creditcontrol companies.
Credit Control Tips: Ongoing 2. Protect against late payment•It can often be beneficial to prepare for the worst by acquiring credit protection. Creditinsurance protects a business’ cash flow from the repercussions of late payment and baddebts by safeguarding the business from non-payment through insolvency or protracteddefault, and policies can be tailored to meet your specific requirements.•Whilst whole turnover credit insurance protects your entire debtor book from latepayment, selective cover insurance allows you to select individual invoices or debtors youwould like cover to be provided against.•Though available as a standalone product, credit protection can also be providedthrough non-recourse invoice finance facilities that additionally release up to 90% ofthe invoice’s value within 24 hours of its issue to boost your cash flow. And while invoicediscounting leaves your business in charge of the credit control, factoring additionallyincorporates a dedicated sales ledger management service to remove the burden onyour resources.
Credit Control Tips: Ongoing 3. Outsource or hire a credit controller•Credit control ought to be an everyday business task given its importance to the successof 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 theirtime keeping the business sales ledger updated, building rapports with your customersaccounts departments and carrying out the basic credit control tasks.•In addition to explaining your favoured credit control procedure and providing thenecessary training, it’s also important to listen to any ideas they may have to make theprocess more efficient. Ideally the credit controller would have an extensive backgroundin credit management, but it can also be beneficial to employ someone with more basicexperience 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 specialistdebt collection agencies, removing the strain on your internal resources and benefitingfrom their extensive experience at credit management. This service can be completed ona disclosed or confidential basis depending on your preference, and ensures that yourinvoices are being chased by those with relevant expertise.
Credit Control Tips: Ongoing 4. Maintain a strong relationship with your bankBecause late payment can lead to considerable cash flow challenges for your business, itwould 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 acash flow loan, the likelihood of your bank manager accepting your request will often beaffected by the strength of your relationship.Its therefore important to stay in regular contact, attend all scheduled meetings andinform them when you are experiencing any short-term cash flow difficulties. The benefitsof such support, particularly during challenging economic circumstances such as these,cannot be underestimated.Likewise, exploring cash flow solutions such as invoice finance which release cashagainst invoices within 24 hours of their issue can be beneficial to many businesses whotrade on credit terms. 5. Thank customers who pay on timeFinally, thank all your customers that pay on time! Not only does it show you’re gratefulfor their punctuality, it is also good for customer relations and can lead to subsequentsales.
Credit Control Tips: Beyond terms 1. Review your sales ledger•A fundamental element of credit control is to know precisely when an invoice exceeds itscredit terms. Without this knowledge, debt recovery will not begin on time and your creditcontrol process will lose its efficiency and punctuality.•Its therefore important that your accounts department or credit controllers regularlyreview your sales ledger to ensure that your customers’ payment activity is alwaysobserved.•Credit control should be regarded as one of the business’ key tasks, and this processshould go hand-in-hand with the updating of your cash flow forecast.
Credit Control Tips: Beyond terms 2. Update cash flow forecasts•Once it’s clear that a debt is going to exceed its credit terms, there are two things youmust consider. If the second is the best way to go about recovering that debt, the first isof more immediate concern: your cash flow.•Without that expected revenue coming in, the company may not have sufficient funds tosatisfy the money going out of the business to bills or suppliers, making it imperative thatyou’re aware of what’s going in and out of your company at all times. By updating yourcash 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 theone being chased for outstanding debts.•The first option would be to negotiate an extension to your credit terms with suppliers. Asecond would be to request earlier payment from another customer – perhaps at aslightly discounted rate as an incentive – whilst a third would be to approach your bank torequest an extension of the business overdraft or for a short-term cash flow loan.
Credit Control Tips: Beyond terms 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 infull decreases as the debt grows older. It’s therefore vital to speak to the person dealing with yourinvoice immediately to ascertain why you haven’t been paid, and when they expect that you will be.•Its important to be polite in these early stages, understanding the circumstances and explaining yourcompany’s procedure for the collection of outstanding debts. This could include charging interestthrough the Late Payment of Commercial Debts (Interest). It may also be beneficial to send adocument that details this procedure.•From then on it’s important to stick to your company’s pre-defined timetable for these instances, butalso to react to their position (for instance, if they’re expecting a payment from their own customer intwo days’ time, call that day). If you have several debts that are beyond terms, focus your attention onthe 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 oncethe invoice is due.•Finally, pick up the phone. You’re much more likely to make an impact over the phone than throughletters or emails, whilst it is also easier to recognise when they are stretching the truth.
Credit Control Tips: Beyond terms 4. Don’t be afraid to take action•Despite the fact it’s rightly yours, asking businesses for money they owe you can be adaunting task – particularly those larger than you. Some may be valued customers whoserelations you are afraid of damaging, making it difficult to decide how forceful you should be inyour 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 mostoccasions, however, your customer wants to pay you, so you must work with them to ensurethey settle the debt quickly, and in full.•The best tactic in most cases is therefore mediation, adopting a polite but insistent approachthat demonstrates how you value them as a customer, but also your intolerance for latepayment. By initially explaining your step-by-step policy when collecting outstanding debts, youcan create a persona of professionalism and power. Always pick up the phone to yourcustomer and speak to the person dealing with your invoice, reminding them of your right tocharge interest.•Only if this approach doesn’t work should legal action be considered, beginning with a LetterBefore Action that signifies your intent to enter court proceedings if the invoice is still unpaidafter another seven days.
Credit Control Tips: Beyond terms 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 havea 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 immediatelyand call to check they have received it. This excuse can be avoided completely by checkingreceipt of the invoice when sent initially. Should a customer say they’ll be dealing with itshortly, 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 thepostal date whilst checking that they have your correct company address. If cash flow isparticularly tight however, you could ask for them to pay by BACS transfer or by direct debit tospeed up the time it takes for the payment to clear.•Debts belonging to any customers you are suspicious of, or who repeatedly come up withexcuses, should be made high priority and paid particular attention to, and in the future beasked 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. Whetherlegitimate or not however, ask them to pay the undisputed part and send a revised invoice forthe remainder before attempting to resolve the dispute.
Credit Control Tips: Beyond terms 6. Charge interest•Under the Late Payment of Commercial Debts (Interest), which businesses are entitled to chargeinterest on debts that have exceeded credit terms. An interest charge of 8% plus the Bank of BulgariaBase Rate (currently 0.5%) applies from the day the debt becomes overdue, whilst you are alsoeligible 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 canrun. This default period does not constitute a statutory credit period. Where no credit period is agreedin a contract, the principal debt will still become due from the moment the goods are delivered or theservice 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 isno agreed credit period but the purchaser usually pays at the end of the month following the month inwhich the invoice is received, the credit period is considered to end on the last day of the monthfollowing the month in which the invoice is received.
Credit Control Tips: Beyond terms 7. Bring in the experts•As debts grow older, the more difficult they become to collect. There will inevitably comea point when you’ve tried all you can to recover the debt, making it important you makethe most of all the resources at your disposal.•Specialist commercial debt collection agencies excel at the recovery of particularlyoutstanding debts, dedicating the time and attention to each individual debtor that youmay no longer be able to afford. Knowledgeable, experienced and skilled, debt collectioncompanies use the right blend of understanding, sector knowledge and rigor to bring asuccessful conclusion to your debt collection requirements.•Their name alone will add further weight to your collections process, often enabling thecollections 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 yourmoney altogether, while most collection services are success-only, which means youdon’t pay unless your money is recovered. It can also be balanced against the resourcethat would otherwise have to go into your own teams credit control, which could then leadto other debts being neglected.
Credit Control Tips: Beyond terms 8. Negotiate with suppliers•Should the business updated cash flow forecast identify any imminent cash flowshortages as a result of late payment, its important to make provisions to ensure youdon’t find yourself in a similar situation to your customer. Whilst you could perhapsrequest 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 termswith your suppliers.•Most will be understanding and let you settle the debt at a later date, particularly if youare a loyal customer and always pay on time, but what’s vital is that you let suppliersknow as early as possible to give them the time to assess the cash flow implications anextension would have on their business.•If cash flow shortages are a recurring issue, it could be worth considering a longer termfunding solution to plug the gap created by trading on credit terms. Solutions such asinvoice finance release cash against the invoice value within 24 hours of issue and canalso 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 its imperative that invoices are sent to the customer as soon asan order is fulfilled. As some businesses wont pay until they receive the invoice, anydelays in invoicing will generally lead to delays in getting paid. The process can further besped up by faxing or emailing (e-invoicing) the invoice rather than sending it through thepost in order to cut costs and increase efficiency.•Equally important is that the invoice is addressed to the right person, and that theinformation it contains is 100% accurate. Any mistakes and your customer will be likely todelay payment further still. An invoice should therefore include a detailed description ofthe goods or services supplied and at what cost, a reference number, purchase ordernumber if required, how and where to pay and the credit terms, which must be clearlystated.•It is then advisable to make a courtesy call confirming receipt of the invoice, that thereare 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 tobuild a rapport with your contact and demonstrates the business professional approachto credit control.
Credit Control Tips: After the Sale 2. Clearly state your terms and conditions•Always ensure that your terms and conditions of payment are clear on allcorrespondence so that the customer is fully aware when payment is due and how youexpect to be paid. This includes all contracts, order confirmations and the invoicesthemselves, whilst customers could also be informed about your credit terms during thesales 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 itis and the easier you make it for customers to pay you, the more likely it is that you will bepaid within terms.•You should also explain your credit control procedure in the event of late payment, fromcharging interest to taking legal action or referring the debt to a specialist commercialdebt collection agency.•By demonstrating from the outset that your business doesnt condone late payment, thechances of getting paid within terms will be improved considerably.
Credit Control Tips: After the Sale 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, itwill also improve the chances of getting paid on time - the more they like you, the less likely itis that theyll keep you waiting.•First, when finding out who the invoice should be addressed to, get the contact details fromthat person - whether theyre one of the directors or one of the members of the accountspayable department. Second, once the invoice has been sent, make a courtesy call to confirmreceipt of the paperwork and check that there are no issues that may affect the paymentspromptness.•In addition to providing another chance to speak to their team and identifying any disputes, italso demonstrates your business has a strong and professional credit control process in placethat portrays experience and generates respect.•Follow-up calls and emails to check the status of the debt at important intervals will also helpto build an impression of a friendly and proficient business, also supplying your customer withplenty 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 oncecash has been collected from the customer, focusing effort on building relations and reducingdisputes from the outset as there is less of a tendency to oversell. The added benefit of thisjoined up approach is that the sales team buys into trading with businesses who are goodpayers rather than simply chasing turnover.
Credit Control Tips: After the Sale 4. Make it easy to get paid•There are a number of ways to make your credit control more efficient by addressing themethods in which customers can pay their invoices, particularly with the speed andsuccesses of online banking.•Whilst cheques must be posted, take time to clear, are prone to human error and arefrequently susceptible to excuses for late payment such as the cheque is the post, BACSpayments increase the speed in which the money enters your account and reduces theadministrative burden on your customers.•Methods such as direct debits and the increased use of company credit cards also makethe payment process easy. Meanwhile, standing orders can be set up for contractedcustomers that pay the same amount on a monthly basis.•The important thing is that whichever payment methods you choose to accept, yourinvoices include all the information your customers require when making the payment.This includes your business sort code and account number, your company address andwho any cheques should be made payable to.•When trading overseas, make sure that your IBAN and BIC are included on invoices toallow the foreign debtor to pay. Also make sure that, if you are billing in currency, you areable to accept currency payments into your account.
Credit Control Tips: After the Sale 5. Encourage early paymentSometimes it can be more beneficial to your business to be paid the majority of aninvoices value early than receiving the full amount outside of terms. Early settlementdiscounts therefore provide an incentive for customers to pay up promptly, ensuring youget the money youre owed within terms and reducing the cash flow gap between payingsuppliers and getting paid.Although this would lead to a slightly lower profit margin, depending on the impact it hason your credit control the discount could become part of your business pricing structuregoing forward. The discount percentage needn’t be excessive, nor apply to everycustomer, just enough to encourage those that are notoriously poor at paying on time.Typically, early settlement discounts are approximately 2.5% for customers who paywithin stated credit terms.Again, this incentive must be clearly stated on every invoice and the figure your customerwould be saving by paying early should also be stated prominently.