Credit control – or the processes a business uses to ensure customers pay their invoices on time and in accordance with their credit terms and conditions – is a vital aspect of any company’s financial health.
The dangers of failing to implement a consistent, well-enforced credit control strategy can be severe. According to research from NatWest, 27% of UK small businesses are owed between £5,000 and £20,000 in unpaid invoices. Not only that, but nearly a third (31%) admit to spending between 21-30 hours a month chasing customers for payment. According to the research, which was published in December 2023, over half (55%) of SMEs reported that late payments had increased in the past six months.
And, according to a 2023 report from the Federation of Small Businesses (FSB), this situation resulted in 37% of businesses applying for credit to manage their cash flow in 2022. Meanwhile, around 440,000 businesses were threatened with closure in 2022 as a direct result of late invoice payments.
What credit control challenges do businesses face?
When your business was young, you probably didn’t have any credit control processes in place. You probably just issued your invoices and hoped the money came in! Now your business is growing bigger, though, cash flow can quickly become an issue if you don’t have proper strategies in place for managing credit.
Some of the most common credit control-related difficulties businesses experience include:
- Not having payment terms or conditions in place (or not making these clear to customers)
- Failing to carry out credit checks on new and existing customers
- Leaving it too late to chase late payments
- Not appointing a person or people to take direct responsibility for credit control
- Making mistakes on invoices.
Many of the clients we work with are ambitious, growing businesses who have simply outgrown their current accounting and credit control practices. They have reached a point where their lack of proper strategy is actively holding their business back.
In this situation, they have two choices: invest what they can afford (which may not be enough) in overhauling their accounts receivable processes, or outsource their finance function to an external expert.
The benefits of outsourcing
An academic paper published in Knowledge Horizons – Economics outlines the benefits and risks of outsourcing; benefits include the following:
- The firm can focus on its core activity, ensuring the highest profit
- Ability to share risks and responsibilities with a trusted partner
- Lower operational and labour costs, without compromising on quality
- Access to specialised skills and resources that the company doesn’t have in-house
- Faster and better services.
Whilst the report does list some disadvantages, including the potential loss of managerial control and the weakening of innovative and creative capacity, the authors state that this can be entirely avoided by partnering with the right service provider.
At Insight Associates, we offer companies access to a full team of financial management specialists – often for much less than it would cost to hire an in-house team – and work hand in hand with them to implement better credit control processes within their business.
How outsourced credit control services can help you grow your business
Improved credit control processes are often implemented as part of a wider financial management strategy; this will likely also include the introduction of robust financial controls and systems, strategic business planning and high-level financial advice.
When put together, all these measures can help you grow, develop and deliver a multitude of other benefits for your business.
- Cost savings
The average base salary for a credit control job is around £25,000 per year, while the average Finance Director will set you back by over £100,000 annually. And that’s without considering all the additional costs involved in employing somebody, such as pension and National Insurance contributions, holiday and sick pay.
Outsourcing to a specialist company means that you get access to a wide range of financial experts whose only job it is to help companies like yours improve their accounting and credit management processes. As well as saving on salary, they’re likely to help you save money by streamlining your accounts receivable processes, ensuring you don’t waste money chasing late payments or writing off bad debt, and generally helping your business function more efficiently.
- Improved cash flow
Cash is the lifeblood of any business – without it, it is difficult for firms to meet their accounts payable obligations. Much of the time, it means that they simply pass on the problem of late payment down the supply chain, causing other businesses to suffer similar financial difficulties. In the worst-case scenario, a lack of cash can lead to business insolvency, as we saw earlier.
Outsourcing your finance function to professionals will ensure your business has a positive cash flow and the ability to pay for goods and services in a timely manner. Not only will this keep your business financially healthy, but you’ll enjoy a better relationship with your suppliers if you have a reputation for prompt payment!
- You can focus on what you do best
Outsourcing functions such as accounting, credit control and financial strategy to a third party enables you to focus on your primary business – rather than spending all your time building and running your accounts department. According to research, “outsourcing administrative tasks like bookkeeping and accounting helps you to focus your time, energy and resources on creating business strategies, bringing in more revenue, as well as networking and building relationships with your customers.”
In turn, this can help increase your business’s profitability and boost the cash you have available to invest back into your growing business.
- Reduced amount of bad debt
‘Bad debt’ is a term given to any payment owed to you that is no longer considered collectable, meaning that it has to be written off. It is a situation that 27% of businesses struggled with in 2022, writing off a total of £5.8 billion. Nineteen percent of SMEs wrote off debt to the tune of £31,330, while 9% were forced to write off over £100,000.
An outsourced financial management company will have arrangements with credit reporting agencies, meaning that they’ll be able to run company credit reports on any new or existing customers. The report will reveal information such as the business’s credit score, financial statements, their payment behaviour, and any adverse information such as County Court Judgements (CCJ) against them. Your service provider will be able to help you spot any warning signs that might point to an inability to repay invoices, consistent late payment, or legal action.
They will also help you put a range of measures in place to deal with late payment where it does occur – for example, clear payment terms, processes to resolve disputes, and sanctions for consistent late payers.
- Better credit rating
Being paid on time means that you have the capital available to pay your own financial obligations on time. In turn, this is likely to improve your credit score as well as your reputation with commercial lenders, ensuring that you can secure funding when you need it.
Of course, having a healthy cash flow also means that when you do borrow, you are doing so to fund activities that will have a direct impact on business growth – not simply to plug cash flow gaps.
Your financial management partner
At Insight Associates, we’ve spent more than three decades helping ambitious businesses remove the financial barriers to growth and success. By implementing good credit control procedures and providing the financial data you need to make good decisions about your business, we can help you move into the future with confidence.
Why not give us a ring on 01279 647447 to have a chat about what we can do for you?
