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Credit Management

27 August 2008

One of the biggest assets on most smaller companies Balance Sheets is their Debtors - the balances on their Sales Ledger which are the amounts they are owed by their Customers. Unless the business uses considerable plant or machinery in its' activities (Fixed Assets) then often there is little real substance beyond these Trade Debtors

It is interesting then that so few businesses pay the attention to this vital asset that they really deserve. If you were dealing with physical assets, like your equipment, you would invest in security systems and ensure they were secure when people were not around to guard them. However, these critical Debtors are often seen as just the last step in the sales process - an invoice waiting to be paid, and little is done to protect their value.

There is often very considerable risk in a company’s Debtors balances - what if the customer does not pay, won’t pay or can’t pay? It can frequently lead to the businesses failure - or at best a very cash strapped period of recovery.

So what should be done to secure these balances and make sure they are collected when due?

Create a credit policy and stick to it
It is critically important that you have a clear and well communicated policy on the credit terms you offer customers and the circumstances under which you offer it. Any deviations from this policy should only be by clear senior management action. Your policy should define what risk you are prepared to take, and areas such as obtaining credit insurance to reduce risk.

Credit check all your customers - regularly
This means checking them out properly. You should obtain a full credit report and study it, and also obtain first hand references. It really achieves nothing running off a cheap credit report and just accepting their recommendation. It is your risk you are managing not theirs!  You should also periodically re-check existing customers to ensure your view on them is up to date.
Having collected this information, set a credit limit and a collection policy and stick to it!  A recent study suggested that 50% of smaller businesses continued to deliver goods on credit terms to debtors when unpaid debts were already over 90 days old!

Make sure your terms and conditions of trade are up to date
You must ensure that your terms and conditions of trade are meaningful and up to date. If at all possible have your customers sign a credit application form which collects full information about them and has them sign to agree your terms of business. There is no point relying on conditions printed on the back of invoices - that is too late, the contract is completed by then!

Clearly state your terms of payment
In bold type on the face of your invoice you should state the date on which the invoice is due for payment. Don’t allow any room for misunderstanding.

Make it easy for customers to pay you
Again on your invoices clearly state how payment can be made, cheque, BACS, credit card and whatever other means you can offer.

Chase debts when they fall due
Ensure someone in your business has clear responsibility to collect debts and that they actually do it. Don’t leave it until they are overdue, a friendly phone call just before the due date may help ensure timely payment. If the payment is late, be consistent, follow up calls and persevere.

Deal with any queries quickly and fully
If a customer raises a query on the invoice or the goods or services received, deal with it quickly and ensure the customer is satisfied with the response. Then make sure you are clear when payment will be made.

Don’t hesitate to use outside help
If your own efforts in collecting an outstanding debt are having no impact, then don’t hesitate to look for outside help. A Solicitors letter or a Debt Collection Agency can often have great results as the customer will fear action being taken against him. A recent study suggested that only 3% of companies used outside agencies, and only then when debts were on average 11 months old!

Regularly monitor your debtor balances - report exceptions
Ensure that you see a regular summary of the amounts you are owed (an Aged Debt report), with clear explanations on the actions being taken to collect any overdue balances. It is also useful to review trends and a good way of doing this is by calculating on a monthly basis “Days Sales Outstanding” or DSO. This is the total value of your debtors divided by your average daily sales.

Instill a culture that a sale is not a sale until the customer has paid
It is critical that your business is cash focused, and that it only sees a sale as being a sale when the cash is in the bank. Consider commission schemes for sales related staff that only pay on cash collection, and get them involved with ensuring it happens!

It is often said that “cash is king”, and this is so true and should never be forgotten. Many good businesses have failed not because they did not have a good product or were not profitable, but because they forgot to manage the risk they take every time they offer a customer credit!

If you feel you need any assistance in the credit management process in your business, call us now on 0800 180 4265

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