How to improve your business’s credit control procedures

Effective credit control is one of the most important aspects to running a successful business. Without money coming in on time, your business’s cash flow can be severely affected and the associated problems can quickly get out of hand.

What many businesses fail to realise is that the process of avoiding the problems of late payment and bad debt begins as soon as an order is placed – and your credit control procedures should reflect this. It’s a vital process that starts with knowing your customers before you sell to them and only ends once you have been paid.

Here, we break down the credit management process into four key stages and provide step-by-step credit control tips, tactics and procedures for businesses to follow in order to get paid on time, every time.

To discuss how Hilton-Baird can help at any stage of the credit control process, from the recovery of aged debt to a fully outsourced and confidential credit control service, contact our team on 0800 9774848 or request a call back.

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Credit control tips: Before the sale

Making sure your business receives the money it’s owed in full and on time begins as soon as an order is placed, something too many businesses fail to realise. Here are some important steps your business should take before you accept any new orders.

1. Create a clear credit control procedure

One of the most important but frequently overlooked elements of the credit control process is the actual process itself. By clearly setting out a day-by-day strategy from the moment the order is placed until the invoice is paid, your accounts receivables team can adopt a co-ordinated and professional credit control procedure.

Once your partners, accountants and senior management have agreed the timetable, the next task is to introduce it to the accounts department and ensure that the necessary levels of training are provided so that all stages are adequately completed and meticulously stuck to.

Stages can range from invoicing the day the order is fulfilled and courtesy calls or letters that politely, but firmly, remind the customer of their obligation to pay you. Should the invoice not be paid after a certain time, it may be beneficial to pass the debt over to a specialist commercial debt collection agency.

For instance, businesses trading on credit terms of 30 days could adopt the following timetable once goods have been delivered or services provided:

This infographic offers 15 ways to strengthen and improve your credit control timeline.

2. Know your customer

With late payment and bad debts commonplace in the current climate, it’s becoming increasingly important to know your customer before committing to offering credit terms.

The first step is therefore to obtain all the necessary business information, including their full trading name, legal status, registration number, address and the key contact details of the management and contact responsible for accounts payable. An effective way of doing so is by sending an application form for completion, which could also detail your business’s terms and conditions of trade.

Using this information, it is then possible to ask a credit expert to check the credit risk posed to your business through the extensive range of credit rating services on the market. Credit reports are available for as little as £10 per report, whilst the cost can be offset against the impact a bad debt would have on your business’s finances and its cash flow. Online credit checks can be completed in a matter of minutes. This process is particularly important when taking orders from larger customers, where late payment can carry heavy consequences.

Should their credit score be low, you can therefore demand full or partial payment up front, decline their order, or at the very least take extra caution when performing credit control.

This blog looks at the advantages and disadvantages of performing credit checks as part of your credit control process.

3. Compile a stop list

For persistently late paying customers, or those with a poor credit rating, it can often help to place them on a ‘stop list’ or a ‘watch list’ to ensure diligence when selling to these companies in the future.

Businesses on the stop list should be informed and not supplied with any further goods or services until all outstanding invoices have been settled at the very least, while those on the watch list should no longer be offered credit terms without an up-front payment or deposit, or perhaps be asked for the full amount to be paid when placing the order.

These lists must be updated regularly and strictly adhered to when issuing credit terms to businesses, ultimately protecting your business’s cash flow from the worst offenders.

For more reasons why not supplying bad customers makes perfect business sense take a look at this blog.

Credit control tips: After the sale

Arguably the most critical phase of the credit control process is the period between the sale and the date the invoice is due. Here are five important steps businesses should follow to enhance success.

1. Invoice quickly and accurately

It sounds obvious, but it’s imperative that invoices are sent to the customer as soon as an order is fulfilled. As some businesses won’t pay until they receive the invoice, any delays in invoicing will generally lead to delays in getting paid. The process can further be sped up by faxing or emailing (e-invoicing) the invoice rather than sending it through the post in order to cut costs and increase efficiency.

Equally important is that the invoice is addressed to the right person, and that the information it contains is 100% accurate. Any mistakes and your customer will be likely to delay payment further still. An invoice should therefore include a detailed description of the goods or services supplied and at what cost, a reference number, purchase order number if required, how and where to pay and the credit terms, which must be clearly stated. This blog shows how to design a high-impact invoice.

It is then advisable to make a courtesy call confirming receipt of the invoice, that there are no disputes and that the customer is aware of the date on which the invoice is due. Not only does this ensure that any issues are ironed out early on, it additionally helps to build a rapport with your contact and demonstrates your professional approach to credit control.

2. Clearly state your terms and conditions

Always ensure that your terms and conditions of payment are clear on all correspondence so that the customer is fully aware when payment is due and how you expect to be paid. This includes all contracts, order confirmations and the invoices themselves, whilst customers could also be informed about your credit terms during the sales process.

Invoices must be clear and easy to understand, prominently displaying your credit terms, the actual payment date, and the acceptable payment methods and details. The simpler it is and the easier you make it for customers to pay you, the more likely it is that you will be paid within terms.

You should also explain your credit control procedure in the event of late payment, from charging interest to taking legal action or referring the debt to a specialist commercial debt collection agency. Under the Late Payment of Commercial Debts (Interest) Act 1998, businesses are legally entitled to charge interest on debts that exceed their credit terms.

By demonstrating from the outset that your business doesn’t condone late payment, the chances of getting paid within terms will be improved considerably. This blog post looks at 12 questions you should consider answering.

3. Maintain a positive relationship

Building a friendly and positive relationship with your customers carries several advantages. Not only will it encourage them to purchase more goods and services from your business, it will also improve the chances of getting paid on time – the more they like you, the less likely it is that they’ll keep you waiting.

It’s therefore important that time is taken to establish a rapport with those dealing with your invoices, and the early stages provide a perfect opportunity for this. First, when finding out who the invoice should be addressed to, get the contact details from that person – whether they’re one of the directors or one of the members of the accounts payable department. Second, once the invoice has been sent, make a courtesy call to confirm receipt of the paperwork and check that there are no issues that may affect the payment’s promptness.

In addition to providing another chance to speak to their team and identifying any disputes, it also demonstrates your business has a strong and professional credit control process in place that portrays experience and generates respect. If any disputes are identified, it is important to ensure they are resolved as quickly as possible by the right person and having the appropriate contact within the customer’s business is vital to speeding up this process.

Follow-up calls and emails to check the status of the debt at important intervals will also help to build an impression of a friendly and proficient business, also supplying your customer with plenty of opportunities to inform you if payment is likely to be delayed for any reason.

It is becoming more commonplace for businesses to incentivise their sales teams only once cash has been collected from the customer, focusing effort on building relations and reducing disputes from the outset as there is less of a tendency to oversell. The added benefit of this joined up approach is that the sales team buys into trading with businesses who are good payers rather than simply chasing turnover.

Finally, thank those customers who do pay on time!

4. Make it easy to get paid

There are a number of ways to make your credit control more efficient by addressing the methods in which customers can pay their invoices, particularly with the speed and successes of online banking.

Whilst cheques must be posted, take time to clear, are prone to human error and are frequently susceptible to excuses for late payment such as ‘the cheque is the post’, BACS payments (Banks Automated Clearing System) increase the speed in which the money enters your account and reduces the administrative burden on your customers.

Methods such as direct debits and the increased use of company credit cards also make the payment process easy. Meanwhile, standing orders can be set up for contracted customers that pay the same amount on a monthly basis.

The easier it is for your customers to pay, the fewer excuses they’ll have not to. Read our blog on the different types of payment methods which are available to businesses.

The important thing is that whichever payment methods you choose to accept, your invoices include all the information your customers require when making the payment. This includes your business sort code and account number, your company address and who any cheques should be made payable to.

When trading overseas, make sure that your IBAN and BIC are included on invoices to allow the foreign debtor to pay. Also make sure that, if you are billing in currency, you are able to accept currency payments into your account.

5. Encourage early payment

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. Early settlement discounts therefore provide an incentive for customers to pay up promptly, ensuring you get the money you’re owed within terms and reducing the cash flow gap between paying suppliers and getting paid.

Although this would lead to a slightly lower profit margin, depending on the impact it has on your credit control the discount could become part of your business’s pricing structure going forward. The discount percentage needn’t be excessive, nor apply to every customer, just enough to encourage those that are notoriously poor at paying on time. Typically, early settlement discounts are approximately 2.5% for customers who pay within stated credit terms. This blog looks at the pros and cons of early settlement discounts.

Again, this incentive must be clearly stated on every invoice and the figure your customer would be saving by paying early should also be stated prominently.

Another low-cost way to encourage prompt payment would be to enter all those businesses that pay inside a week, for example, into a competition, which would also improve your customer relations.

Credit control tips: Beyond terms

Once credit terms have been exceeded, it’s vital to move quickly to recover the debt and keep an eye on the likely effect on cash flow. Here are some of the ways in which you can minimise the impact.

1. Review your sales ledger

A fundamental element of credit control is to know precisely when an invoice exceeds its credit terms. Without this knowledge, your credit control process will lose its efficiency and punctuality. This blog post gives four reasons to regularly review your sales ledger.

It’s therefore important that your accounts department or credit controllers regularly review your sales ledger to ensure that your customers’ payment activity is always observed.

Credit control should be regarded as one of the business’s key tasks, and this process should go hand-in-hand with the updating of your cash flow forecast.

2. Update cash flow forecasts

Once it’s clear that a debt is going to exceed its credit terms, there are two things you must consider. If the second is the best way to go about recovering that debt, the first is of more immediate concern: your cash flow.

Without that expected revenue coming in, the company may not have sufficient funds to satisfy the money going out of the business to bills or suppliers, making it imperative that you’re aware of 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.

The first option would be to negotiate an extension to your credit terms with suppliers. A second would be to request earlier payment from another customer – perhaps at a slightly discounted rate as an incentive – whilst a third would be to approach your bank to request an extension of the business overdraft or for a short-term cash flow loan.

Updating your cash flow forecast as and when an invoice exceeds its terms therefore puts you back on the front foot, ensuring there are no nasty surprises.

3. Chase as soon as credit terms are exceeded

Once an invoice exceeds its credit terms, the pressure’s on as the likelihood of collecting the debt in full decreases as the debt grows older. It’s therefore vital to speak to the person dealing with your invoice immediately to ascertain why you haven’t been paid, and when they expect you to be.

It’s important to be polite in these early stages, understanding the circumstances and explaining your company’s procedure for the collection of outstanding debts. This could include charging interest through the Late Payment of Commercial Debts (Interest) Act 1998 and may result in the handing over of the debt to a specialist commercial debt collection agency after a certain time, demonstrating your business’s professional and tough credit control process. It may also be beneficial to send a document that details this procedure. This blog post highlights your options when a debt becomes overdue.

From then on it’s important to stick to your company’s pre-defined timetable for these instances, but also to react to their position (for instance, if they’re expecting a payment from their own customer in two days’ time, call that day). If you have several debts that are beyond terms, focus your attention on the high risk debts (i.e. the largest or the oldest, or those with companies that are in financial trouble) above the smaller and newer debts.

All correspondence must be logged, detailing who you spoke to and when, as well as what was said. This should be done throughout the entire credit control process, but it’s particularly important once the invoice is due.

Finally, pick up the phone. You’re much more likely to make an impact over the phone than through letters or emails, whilst it is also easier to recognise when they are stretching the truth.

4. Don’t be afraid to take action

Despite the fact it’s rightly yours, asking businesses for money they owe you can be a daunting task – particularly those larger than you. Some may be valued customers whose relations you are afraid of damaging, making it difficult to decide how forceful you should be in your correspondence. This blog gives 5 reasons why SMEs need to let go of the fear and take action.

What must be remembered is that, by not paying on time, they have damaged your business’s cash flow and taken advantage of the trust you afforded them by offering credit terms. On most occasions, however, your customer wants to pay you, so you must work with them to ensure they settle the debt quickly, and in full.

The best tactic in most cases is therefore mediation, adopting a polite but insistent approach that demonstrates how you value them as a customer, but also your intolerance for late payment. By initially explaining your step-by-step policy when collecting outstanding debts, you can create a persona of professionalism and power. Always pick up the phone to your customer and speak to the person dealing with your invoice, reminding them of your right to charge interest on the debt under the Late Payment of Commercial Debts (Interest) Act 1998.

Only if this approach doesn’t work should legal action be considered, beginning with a Letter Before Action that signifies your intent to enter court proceedings if the invoice is still unpaid after another seven days.

Alternatively, you can refer the debt to a commercial debt collection agency with extensive experience in chasing outstanding debts. Costs for their debt recovery service can be offset against the risk of failing to recover the debt and legal fees.

5. Be sceptical

Don’t take your customers’ excuses as to why you haven’t been paid on time at face value. More often than not, such excuses merely act as delaying tactics, so businesses should have a procedure in place to deal with each common excuse, thus restricting their delaying power.

For instance, if they deny ever receiving an invoice, email or fax a copy through immediately and call to check they have received it. This excuse can be avoided completely by checking receipt of the invoice when sent initially. Should a customer say they’ll be dealing with it shortly, ask when and call again at the time they give you.

The common excuse is “the cheque is in the post”. First, ask for the cheque number and the postal date whilst checking that they have your correct company address. If cash flow is particularly tight however, you could ask for them to pay by BACS transfer or by direct debit to speed up the time it takes for the payment to clear. This video looks at some of the most common excuses – and how to get around them.

Debts belonging to any customers you are suspicious of, or who repeatedly come up with excuses, should be made high priority and paid particular attention to, and in the future be asked for full or partial payment when placing an order with you.

Those that dispute all or part of an invoice may also be doing so to bide some time. Whether legitimate or not however, ask them to pay the undisputed part and send a revised invoice for the remainder before attempting to resolve the dispute.

6. Charge interest

Under the Late Payment of Commercial Debts (Interest) Act 1998, which was later revised in 2002, businesses are entitled to charge interest on debts that have exceeded credit terms. An interest charge of 8% plus the Bank of England Base Rate applies from the day the debt becomes overdue, whilst you are also eligible to claim debt collection costs of at least £40, depending on the invoice’s value:

If there is no agreed credit period, the Act sets a default period of 30 days after which interest can run. This default period does not constitute a statutory credit period. Where no credit period is agreed in a contract, the principal debt will still become due from the moment the goods are delivered or the service performed. The 30-day default period starts running from the latter of the following actions:

A payment is late once the agreed period or the default period has expired.

In the case that there is no agreed credit period but the purchaser usually pays at the end of the month following the month in which the invoice is received, the credit period is considered to end on the last day of the month following the month in which the invoice is received.

In this case, interest will start to run on the next day. Where either the purchaser is dealing with a new supplier or there is any other reason to doubt whether this kind of arrangement can be regarded as established practice between supplier and purchaser, the purchaser should ensure that there is an agreed credit period, otherwise the default period of 30 days might apply.

Informing your customers of this statute should give them an added incentive to settle the invoice as soon as possible, whilst claims can be made at any point during the following six years.

In addition to compensating your business for the adverse effect late payment is likely to have on your business’s cash flow, the money could be used to cover the costs of referring the debt to a commercial debt collection agency or for taking the customer to court.

Calculate how much interest you’re owed

7. Bring in the experts

As debts grow older, the more difficult they become to collect. There will inevitably come a point when you’ve tried all you can to recover the debt, making it important you make the most of all the resources at your disposal.

Specialist commercial debt collection agencies excel at the recovery of particularly outstanding debts, dedicating the time and attention to each individual debtor that you may no longer be able to afford. Knowledgeable, experienced and skilled, debt collection companies use the right blend of understanding, sector knowledge and rigour to bring a successful conclusion to your debt collection requirements.

This blog post tackles 6 debt collection myths to show that, by employing the right debt collection agency, you could get back what you’re owed.

Their name alone will add further weight to your collections process, often enabling the collections company to play ‘bad cop’ to secure payment whilst you retain your ‘good cop’ role, protecting customer relationships.

The cost of employing debt recovery experts can be offset against the risk of losing your money altogether, while most collection services are success-only, which means you don’t pay unless your money is recovered. It can also be balanced against the resource that would otherwise have to go into your own team’s credit control, which could then lead to other debts being neglected.

Prices vary depending on the value and age of the debt, so it pays to get debt collection companies in early on to minimise costs and maximise your cash flow. A range of other debt collection services are also available.

Get an instant debt collection quote

8. Negotiate with suppliers

Should the business’s updated cash flow forecast identify any imminent cash flow shortages as a result of late payment, it’s important to make provisions to ensure you don’t find yourself in a similar situation to your customer. Whilst you could perhaps request an extension to the business’s overdraft or ask other customers for early payment, perhaps the most obvious solution would be to request temporarily longer credit terms with your suppliers.

Most will be understanding and let you settle the debt at a later date, particularly if you are a loyal customer and always pay on time, but what’s vital is that you let suppliers know as early as possible to give them the time to assess the cash flow implications an extension would have on their business.

It can be awfully tempting to miss an upcoming payment deadline to preserve cash flow, but, as this blog post highlights, there are many negative repercussions of not paying suppliers on time.

If cash flow shortages are a recurring issue, it could be worth considering a longer term funding solution to plug the gap created by trading on credit terms. Solutions such as invoice finance release cash against the invoice value within 24 hours of issue and can also incorporate bad debt protection and outsourced credit control, if needed.

Credit control tips: Ongoing

There are many things a business can do behind the scenes to ensure the efficiency of your credit control. How many of these can you tick off?

1. Assess your performance

Always take time to analyse your business’s credit control performance and ask yourself if the process can be made more efficient, if the team is too big or too small and how your credit terms contrast to those of your competitors.

Central to this process is to compare your average debtor days with the industry norm. Look at the websites of your industry bodies and keep up to date with the news coming out of your sector – many will run quarterly surveys that indicate the sector’s health and the payment trends.

Using that information, you can accurately measure how your business’s credit control department is faring, and then take the necessary steps to ensure it’s where it should be. These steps could be to adjust the standard credit terms you offer customers, introduce early settlement discounts to encourage early payment of debts, renegotiate payment terms with your suppliers, or perhaps reduce the time before you refer debts to credit control companies.

By reacting to the latest trends, you can make sure your business remains on the front foot.

Learn how we could help improve your credit control

2. Protect against late payment

It can often be beneficial to prepare for the worst by acquiring credit protection. Credit insurance protects a business’s cash flow from the repercussions of late payment and bad debts by safeguarding the business from non-payment through insolvency or protracted default, and policies can be tailored to meet your specific requirements.

Whilst whole turnover credit insurance protects your entire debtor book from late payment, selective cover insurance allows you to select individual invoices or debtors you would like cover to be provided against.

Though available as a standalone product, credit protection can also be provided through non-recourse invoice finance facilities that additionally release up to 90% of the invoice’s value within 24 hours of its issue to boost your cash flow. And while invoice discounting leaves your business in charge of the credit control, factoring additionally incorporates a dedicated sales ledger management service to remove the burden on your resources.

Read more about credit insurance

3. Outsource or hire a credit controller

Credit control ought to be an everyday business task given its importance to the success of your business – particularly for those with a large debtor book.

It could therefore be beneficial to hire a full-time credit controller who spends all their time keeping the business’s sales ledger updated, building rapports with your customers’ accounts departments and carrying out the basic credit control tasks. This blog post looks at the reasons, risks and rewards associated with outsourcing your credit control. 

In addition to explaining your favoured credit control procedure and providing the necessary training, it’s also important to listen to any ideas they may have to make the process more efficient. Ideally the credit controller would have an extensive background in credit management, but it can also be beneficial to employ someone with more basic experience who you can train up to perform the tasks in the manner you know works.

The alternative option would be to use outsourced credit control services from specialist debt collection agencies, removing the strain on your internal resources and benefiting from their extensive experience at credit management. This service can be completed on a disclosed or confidential basis depending on your preference, and ensures that your invoices are being chased by those with relevant expertise.

Download our credit control brochure

4. Maintain a strong relationship with your bank

Because late payment can lead to considerable cash flow challenges for your business, it would be useful to be able to call upon your bank when your business is in need of short-term funding to fill the cash flow gap. Whether in the form of an overdraft extension or a cash flow loan, the likelihood of your bank manager accepting your request will often be affected by the strength of your relationship.

It’s therefore important to stay in regular contact, attend all scheduled meetings and inform them when you are experiencing any short-term cash flow difficulties. The benefits of such support, particularly during challenging economic circumstances such as these, cannot be underestimated.

Likewise, exploring cash flow solutions such as invoice finance which release cash against invoices within 24 hours of their issue can be beneficial to many businesses who trade on credit terms.

5. Thank customers who pay on time

Finally, thank all your customers that pay on time! Not only does it show you’re grateful for their punctuality, it is also good for customer relations and can lead to subsequent sales.

To see how Hilton-Baird can help your business throughout the credit control process, contact our team on 0800 9774848 or request a call back.