5 harsh realities of credit control (and how to deal with them)

05/01/2021

Every job has its challenges and credit management is of course no different. Fortunately, it’s not all bad news because for every challenge there is a solution.

Here are five harsh realities that all credit controllers need to face up to, along with ways to overcome them and some helpful resources to further improve your credit management efforts.

Harsh Reality No. 1: It’s a bigger job than you might think

In theory, the job of a credit controller seems easy, perhaps even unnecessary. You provide a product or service and then the customer pays – simple.

Unfortunately, however, in practice the job is much more challenging. And failure to do it correctly could have serious cash flow implications.

Therefore, it’s essential to arm your business with the necessary tools to effectively and efficiently perform credit management and avoid late payment.

How to deal with it:

1. Create a clearly defined credit control procedure

Implementing a clear day-by-day strategy from before an order is placed until payment is received can help to streamline your credit control processes and improve your chances of success.

With clearly defined stages to follow throughout the credit period, you can adopt a co-ordinated and professional procedure for every invoice.

You should base the timetable on best practices and past experiences, and ensure that the necessary levels of training are provided to those responsible for the task so that all stages are adequately completed and meticulously stuck to.

2. Hire a dedicated credit controller

Particularly in smaller businesses who many not have sufficient time or resource to dedicate to credit control, the task can often be picked up by people who may not have the necessary skills or experience to bring the desired results.

In these situations, there can be significant benefits of hiring a specialist to run your credit control on your behalf.

By bringing in an experienced recruit, your credit control efforts will benefit from additional knowledge and likely improve your results. Plus, you’ll regain time to concentrate on other aspects of running your business.

3. Outsource the task to the experts

The alternative and often more cost-effective solution is to outsource the credit management function to a credit control agency.

The reason it can be a more cost-effective option than hiring internal resource is that you’ll avoid the costs and challenges associated with recruiting, training and retaining employees. It also means you’ll avoid complications when that member of staff take annual leave, or go on parental leave, for example.

Perhaps the greatest benefit of outsourcing to a specialist credit control agency, however, is the expertise the external provider will bring. You’ll be able to utilise the resource, experience and knowledge of credit control experts who spend each day obtaining payment professionally and on time on behalf of other businesses just like yours, in turn helping to reduce debtor days and improve cash flow.

Here are some resources to help you:

Harsh Reality No. 2: Late payment hurts

When an invoice exceeds payment terms unexpectedly, it can have a devastating impact on your cash flow. This can then quickly escalate throughout the business, making it difficult for you to meet your own commitments such as paying bills, VAT and PAYE.

Moreover, the time and resource it takes to recover late payment can put additional strain on your business.

How to deal with it:

1. Regularly review your sales ledger

The first step to prepare your business for a potential late payment is to know precisely when an invoice exceeds its credit terms.

This will allow you to be efficient and punctual with your credit control procedures so that any delays are limited and the impact on your cash flow is reduced.

You can achieve this by regularly reviewing your sales ledger to ensure that your customers’ payment activity is always observed and any upcoming payments or overdue invoices are flagged accordingly.

2. Update cash flow forecasts

Once you’ve identified that an invoice is going to exceed its credit terms you have two immediate priorities. Whilst many assume the first step is to determine the best way to go about recovering that debt, this should actually come second to protecting your cash flow.

Without that expected revenue coming in your business may struggle to satisfy its own commitments, which is why it’s vital to ensure that you are aware of exactly what’s going in and out of your company at all times.

By updating your cash flow forecast, you will promptly be aware of any impending gaps in the business’s cash flow, thus allowing you to take a number of steps to ensure you don’t become the one being chased for outstanding debts.

3. Encourage early payment

Early settlement discounts can be used as an incentive to encourage customers to pay up promptly, therefore reducing the chances of invoices exceeding terms.

Whilst this discount would lead to a slightly lower profit margin, sometimes it can be more beneficial to your business to be paid the majority of an invoice’s value early than receiving the full amount outside of terms.

The discount percentage needn’t be excessive, nor apply to every customer, and if the incentive is successful you could even incorporate the discount into your business’s pricing structure going forward.

Here are some resources to help you:

Harsh Reality No. 3: Customers don’t always tell the truth

In an ideal world your customers would never lie to you – especially when it comes to late payment. But unfortunately, some customers will do anything they can to stall on making a payment – even if it means being creative with their excuse.

How to deal with it:

1. Be sceptical

One of the most powerful skills a credit controller can have is the ability to spot when a customer is being genuine or not. Being able to identify a fake excuse can speed up the collections process and limit the damage to your business.

You could even have specific procedures in place to deal with the most common excuses. For example, if a customer says the cheque is in the post, ask for the cheque number and postal date and confirm they have the correct company address. If they are being genuine they will know all of these details. Another tip is to ask for payment via an alternative method such as BACS transfer or direct debit.

2. Offer a selection of payment methods

If you make it easy for your customers to pay you, they’ll have fewer excuses not to.

Whilst cheques are a favoured method of payment by customers, from a business perspective they aren’t so popular. They can take time to clear, are prone to human error and leave you open to the common late payment excuse: ‘the cheque is the post’.

Given the speed of online banking many businesses now prefer to accept other methods such as BACS, direct debit or credit card.

Whichever methods you choose to accept, always make sure that your invoices include all the relevant information customers will need when making a payment.

3. Always follow through on warnings

Some businesses will intentionally delay a payment to preserve their own cash flow if they feel they can get away with it.

So, to prevent this from happening to your business, always demonstrate a persistent and professional credit control strategy and never let your customers think it’s OK to pay late.

This means if you have warned the customer that you use tactics such as charging late payment interest, outsourcing to a debt collection agency or taking legal action and they still don’t pay, you should follow through on your warnings.

Not only will this encourage them to pay what they owe, it will also make them think twice about doing it again in the future.

Here are some resources to help you:

Harsh Reality No. 4: There are forces outside of your control

Sometimes, no matter how efficient and effective your credit control processes are, outside forces can significantly reduce your chances of getting paid on time.

For example, when a customer is experiencing their own cash flow difficulties, they may stall making payment to protect their own position. And there’s always a chance that business difficulties can push a customer into insolvency and further reduce your chances of collecting payment.

Fortunately, with the right preparations you can plan ahead and protect your business from the impacts of these issues.

How to deal with it:

1. Get to know your customers

You can reduce the chances of falling victim to late payment by getting to know your customers and the industry they operate in before committing to offering credit terms.

There are a number of ways you can do this, including:

Obtaining business information via account opening forms
Regularly performing credit checks to assess the credit risk posed to your business
Check the Prompt Payment Code to see the payment performance of larger companies
Joining credit circles to share and access creditor trends with fellow companies
Keeping up-to-date with the latest news and economic data so you know which industries are struggling and may need extra caution

Should any of these sources reveal information that suggest the customer poses a risk to your cash flow, you can protect your business by demanding full or partial payment up front, declining their order, or at the very least taking extra caution when performing credit control.

2. Protect your business

It is possible to protect your business against the risks of bad debt by obtaining credit insurance.

In the event an invoice becomes aged or a customer enters insolvency proceedings, bad debt protection ensures that you get paid for any goods or services you have supplied, subject to a designated credit limit.

This safeguards your cash flow against debtor insolvency or protracted default so that you can have peace of mind when trading on credit terms.

3. Collect full or partial payment upfront

If you have any reason to suspect that a customer may not be able to make payment on time or in full you may want to consider collecting full or partial payment upfront.

Whilst some businesses may be unprepared to pay upfront for goods or services they haven’t yet received, offering credit to a company that poses a risk to your cash flow is rarely worth the risk.

Plus, by taking payment upfront, less internal resource will be required for credit management and potential debt recovery.

Here are some resources to help you:

Harsh Reality No. 5: Sometimes you have to get tough to get paid

Unfortunately, some customers will avoid making payment for as long as they think they can get away with it. In these circumstances there are a number of stronger tactics that can be utilised to encourage them to quickly settle the outstanding invoice.

However, despite the fact the money they owe is rightfully yours, many businesses find the prospect of getting tough with their customers a daunting task. This is particularly true when dealing with larger customers as the fear of losing their custom can be off-putting.

But always remember that by not paying on time they have damaged your business’s cash flow, and you need to take the steps to protect it and ensure it doesn’t happen again.

Plus, the sooner you take action against late payment the greater chance you have of recovering your money.

How to deal with it:

1. Put the customer on a stop list

If a customer is persistently paying late it can be beneficial to place them on a stop list and refuse further service until all outstanding invoices have been settled.

This can often give businesses the necessary encouragement to pay up, especially if they value your product or service.

To be fully effective your stop list must be updated regularly and strictly adhered to at all times. This will demonstrate you don’t tolerate late payment and protect your cash flow from the worst offenders.

2. Charge late payment interest

When a customer exceeds credit terms you are legally able to claim compensation for the adverse effect the late payment is likely to have on your business’s cash flow.

The Late Payment of Commercial Debts (Interest) Act gives businesses the right to charge their customers compensation and statutory interest on any overdue invoices.

The money gained from this can be used to cover the costs of referring the debt to a commercial debt collection agency or for taking the customer to court.

Sometimes simply informing your customers that you charge late payment interest can be enough to encourage them to settle the invoice as soon as possible.

Calculate the interest you’re owed here

3. Outsource the invoice to a debt recovery agency

As debts grow older they become more challenging to recover, leading many businesses to waste valuable time and resource chasing the payment – often at the expense of the rest of their sales ledger.

So, when you feel that you have exhausted all your in-house tactics or would benefit from professional support, it could be beneficial to outsource the debt to a debt recovery agency so that you can concentrate on newer invoices with peace of mind that the aged balance is in safe hands.

With extensive experience in collecting payments from businesses of all shapes and sizes a specialist commercial debt collection agency will use the right blend of understanding, sector knowledge and rigour to bring a successful conclusion to your case.

Plus, the added weight of third party intervention can often be enough to show that late payment will not be tolerated and encourage the customer to pay up.

Get a debt collection quote here