When do you start chasing a late payment? When the work has been supplied? When the payment terms have passed? When your cash starts drying up?
Too many businesses believe invoice collection should begin when they are overdue. However, when some customers respond only to final demands the time between job completion and payment collection can stretch cashflow to breaking point.
Too many businesses delay collection because they are worried that asking customers to pay will drive them away. It is possible to cause offence if you go about it in the wrong way, but you could enhance the relationship if you remain professional.
Here are some credit-control tips intended to help your business:
1. Decide on payment terms with clearly defined terms and conditions and stick to them. As long as they are communicated to your customers, they’ll be expecting you to follow up on any overdue invoices. If you are unsure what terms to use, seek expert advice.
2. All new customers should sign a credit account application form. The signatory should be a duly authorised person who should sign below a statement requesting explicit acceptance of the terms, with particular reference to prompt payment. Any prospective customer who refuses to sign could provide a useful early warning for you.
3. Check out the new customer with a reputable credit reference agency and set your larger customers up for monitoring so that any abnormal activity is spotted at the earliest point. This can help you avoid a bad debt. If an actual or potential problem arises, talk to your customer about how it affects your trading relationship.
4. Every priced document (eg price lists, quotations, etc) should contain a direct reference to ‘prices subject to payment within our terms’.
5. Don’t be afraid to reference prompt payment at the start of every new job or contract. At this point any customer-requested deviation from your standard terms should be confirmed in writing before work starts.
6. It is good business practice to adjust your application for credit each year and send out a new copy to all of your active customers to sign, ensuring that you always have an up-to-date agreement signed.
7. Avoid being subject to the buyers’ terms as printed on any written order by sending an order acceptance ‘subject to your terms of sale’. The last document that changes hands before performance of the contract becomes the contract document.
8. If you are sending out a large invoice telephone your customer shortly afterwards to confirm receipt and acceptance of the invoice to highlight any problems early on. If there are no problems you can confirm the payment date and their intention to honour their agreement. Telephone such customers shortly before the payment is due and seek confirmation it is being processed. If a query or dispute is raised, deal with it promptly and ensure that the customer accepts your response, thereby removing a potential block to payment.
9. If an account does go overdue, ring the customer immediately, ‘We can’t trace your payment, can you confirm it has been sent?’ is less confrontational than ‘Your account is overdue’, but still requires a specific answer.
10. If your best efforts to obtain payment produce no results (and two broken promises to pay is a good indicator) consider what you need to do to protect your investment in that contract. When the terms, as detailed on your invoice are exceeded, send an account overdue letter. Seven-days later send a final demand and seven days later initiate full recovery. Maintain constant communication in between these steps.
Effective collection of money you are owed is vital, no matter how large or small the customer. Ultimately your first responsibility is to protect your business. The consequences of not acting for fear of losing a customer could end up seriously harming your business. It is how you go about it that can make all the difference. Consider your own reactions when suppliers chase you for overdue accounts. If they are rude or offensive you might seek to take your business elsewhere but, if their approach is at all professional, your main reaction may well be ‘What can I do to pay that?’
Christopher Moore is a credit management consultant at ICSM Credit.
Since the credit crunch first began to bite, some UK businesses have had to extend their agreed payment dates and terms, which means that some firms now face waiting as long as five months for payment. The average time it takes for businesses to settle their bills after agreed terms has also extended. Consequently, businesses must ensure their billing process is effective when it comes to overdue payments.
By addressing issues such as cashflow or order book problems early enough, businesses can stop them from escalating. But what action should you take and when do you need to start? Many businesses are too wary of being over-zealous when chasing payment so as not to upset a customer, but avoiding the issue could have a catastrophic effect. Here are ten tips for what to look out for and what steps to take:
1 Know your customer
Whether the customer relationship is new or long-standing, regular credit reports are essential. They are quick and cheap and enable you to be fully informed of any changes with the business. Perhaps you could use a particularly large order as a trigger to run a check or simply implement one every quarter or six months. As well as granting peace of mind it limits your exposure. The next stage is to identify and weed out any high-risk business prospects.
2 Assess payment behaviour
Keep an eye on changes in payment patterns, times and delays, as well as a move from BACS to cheques. These small factors can indicate something is happening behind the scenes. It doesn’t hurt to call the customer and have an informal chat, just to make them aware of your interest. These checks can also indicate how long you will be waiting for payment. Also be aware that bills being settled later and later each month is a key indicator of a business’s deteriorating cashflow.
3 Introduce changes
Your customers may just have a culture of late payment but to combat this, steps should be taken to encourage faster payment, such as direct payment methods or more creative collection strategies. Also monitor CCJs, because these can be a trigger to exercise some caution and review the relationship before extending credit.
4 Carry out checks
Regular company credit checks will also highlight small but possibly significant changes, such as who is on the board and any alteration in the addresses of those members. Also for smaller and newly formed companies, cross reference consumer and business information to build a picture of the personal and wider business interests and the track record of those running the business. Knowing what happened in the past creates confidence in future co-operation. When financial details are limited this can be the best indicator of a business’s commercial integrity.
5 Revise regularly
The validity and worth of credit reports lies in their frequency, which could be related to the value of business done, the importance of the account or the volatility of the market they are in. There is no point running one at the start of a working relationship and believing that will ensure there is no risk.
6 Be aware
Be mindful of external economic pressures because if you are feeling them you can be sure your customers are, too. The warning signs these present can be more effective than any internal procedures and controls. There is help - use the credit community, it's what it's there for; share information about your debtors and listen to what other industry people have to say.
7 Be accountable
Often businesses with poor trading results tend to delay submitting their accounts as long as possible. Experian research has shown the late filing of annual returns, which is a statutorily required list of directors and shareholders, is a characteristic of failing companies and at the very least can indicate a level of management inefficiency within the business.
8 Keep talking
Keeping communication lines open is key. As long as businesses are talking to their customers, resolutions can be swiftly and easily achieved without the need for legal action that can prove costly.
9 Take action
Don't delay. It’s tempting to wait and hope the payment will be made, but if the process is not started immediately, resolutions will take longer, putting cashflow under greater pressure and leaving you more vulnerable.
10 Call for help
While a business that can demonstrate a clear action plan is in place and was adhered to will more likely achieve a successful outcome, don’t be afraid to ask for help and advice. A quick chat with an adviser could help you identify the next most appropriate step. For example, a legal letter might be enough to bring the matter to an end.
Christopher Moore is the Marketing Manager at ICSM Credit