Every year, startups and small businesses in the United Kingdom face the threat of failure, primarily due to cash flow difficulties. Late customer payments and the risk of bad debt are major contributors to this risk. To protect your business’s growth prospects, it’s crucial to establish a strong credit control process.
Understanding Credit Control:
Credit control plays a vital role in safeguarding a company’s financial well-being. It involves the systematic management of accounts receivable to ensure timely settlement of customer invoices. This proactive approach includes monitoring payment deadlines, addressing late payments, and implementing strategies to optimize cash flow. A well-structured credit control process is essential for financial stability, liquidity, and sustainable growth. It acts as a financial guide, helping businesses avoid cash flow pitfalls and thrive in a competitive marketplace.
Why Credit Control Matters:
Cash flow is the lifeblood of any business. Without it, a company can’t meet financial obligations, invest in growth, or expand its workforce. Credit control is crucial for maintaining financial stability and enabling consistent growth. It involves managing outstanding payments for products or services that haven’t been paid for yet. By actively managing these accounts and taking prompt action on late or missing payments, businesses can improve cash flow, avoid financial difficulties, meet financial commitments, seize growth opportunities, and navigate unforeseen challenges effectively.
To help you enhance your credit control practices, here are ten essential considerations:
Establish a Clear Credit Control Process:
Implement a well-defined and coordinated credit control procedure that includes timely reminders to prevent late payments and reduce the risk of bad debt. Develop a timeline involving multiple team members within your organization, align credit terms with supplier payment expectations, and outline steps for chasing payments.
Conduct Thorough Customer Credit Assessments:
Enhance your credit control process by conducting comprehensive assessments of your customers before extending credit. Identify high-risk clients and focus your research efforts on them to minimize costs. Gather critical business details, such as trading names, registration numbers, addresses, and contact information, to assess credit risk.
Foster Positive Client Relationships:
Cultivate good relationships with clients and maintain open communication channels to ensure the effectiveness of your credit control process. Make courtesy calls to confirm receipt of paperwork or discuss impending invoice due dates. This not only demonstrates professionalism but also allows clients to clarify their circumstances.
Issue Invoices Accurately and Promptly:
Improve credit control procedures by sending out invoices promptly and without errors. Send invoices immediately after order fulfillment, preferably via email. Verify recipient details for invoice accuracy and confirm their receipt to address potential issues proactively.
Encourage Timely Payments:
Facilitate early payments by simplifying the payment process for customers. Clearly provide banking information on invoices and offer various payment methods, particularly online options. Consider offering incentives for early settlements to motivate prompt payments.
Maintain a Watchlist and Take Decisive Action:
Keep a watchlist of customers with a history of delayed payments. Monitor their activities closely and consider requiring a deposit before extending credit. Be prepared to take action against persistent late payers, such as sending legal notices.
Forecast Cash Flow:
While not foolproof, cash flow forecasting offers an approximate outlook of expected revenue and upcoming debt commitments. Regularly update your cash flow forecasts to anticipate unexpected developments and proactively address issues.
Rely on Business Acumen:
Question customer explanations for late payments and request supporting documentation when possible. Don’t hesitate to investigate delays and prioritize clients with a history of late payments.
Simplify Payment Options:
Offer customers a range of payment options, including checks, BACS, credit/debit cards, or cash, to counter common excuses like ‘the check is in the mail.’
Maintain Clear and Consistent Terms:
Clearly communicate your terms and conditions to customers, especially new ones. Ensure they understand late payment policies and potential courses of action. Consistently enforcing terms helps build positive customer relationships.
Leverage Technology:
Consider integrating technology to streamline your credit control efforts. Various tools can provide credit rating insights, automate credit control communications, and offer valuable data for informed decision-making.
Additional Tip: Use Unpaid Invoices for Working Capital:
Turn unpaid invoices into working capital through invoice finance. This approach improves daily cash flow management, reduces reliance on suppliers, and enables advances on due payments.
SMEs and Late Payments:
Late payments significantly impact small and medium-sized enterprises (SMEs) in the UK. A recent report by the Federation of Small Businesses (FSB) highlights the challenges faced by SMEs due to late payments. To address this issue, the FSB advocates measures that hold larger businesses accountable for their payment practices and level the playing field for smaller firms.
Meanwhile, the Department for Business and Trade (DBT) is conducting a prompt payment and cash flow review to enhance support for SMEs dealing with payment challenges. The report emphasizes the need for reforms in late payment practices to alleviate the burden on SMEs and align public perception with actual payment timelines.”
