Lax credit control doesn't pay

Twice as many small businesses are facing crippling problems because they are afraid of tackling late payment.

Almost 60% of small businesses across the UK have suffered difficulties as a result of late payment – up from just a third two years ago – with businesses owed a staggering total of £16bn. Unless businesses begin to tackle late payments seriously, many will go bust.

Research shows it costs ten times more to gain a new customer than to keep an existing customer – so credit management should be ‘customer-focused’. To ensure your company’s collection activity adds to the business relationship, it should consider:

• Taking a customer-focused approach to collections – remaining polite and professional, but also persistent.   Manage disputed invoices by setting a time limit to resolve issues.
• Give new and high-risk customers a ‘customer service’ call before the invoice is due and find out if there are any issues that may delay payment.
• Use late payment legislation as a negotiating tool to get paid more quickly.

The courts are also full of unenforceable judgments because claimants didn’t take the trouble to find out who they were trading with at the beginning of trading relationships. Here are some suggestions to follow in order to be successful if litigation is required:

• Use credit application forms to get all the relevant information.
• When dealing with sole traders and partnerships, get full names and home addresses of owners or partners.
• A change in the County Court regulations last April now means you need the date of birth of individuals in order to get a County Court Judgment (CCJ). Individuals include sole traders and partnerships.

Many smaller businesses are so focused on sales that they forget about the risk of their customer going into receivership and suffering a bad debt. For companies to survive in the current economic climate, it is vital that they reduce their risk of bad debts as much as possible. Here are some suggestions to limit your risk:

• Credit-check new and existing customers regularly. Set credit limits and review them monthly.   
• Subscribe to a monitoring service. You will be informed if there are any changes in the company’s details, such as CCJs or the filing of new accounts.   
• With new start-ups where there is often little information available to assess credit risk, check to see if the directors are directors of other companies and credit-check them.

Most people think credit control is just about collecting payment of overdue invoices – but everything that goes before payment is received affects a company’s ability to get paid.

The process starts when you first start talking to a new prospect. This processes is often referred to the  ‘order-to-cash’ process.

Here are some basic elements of the process, although they will change depending on the type of company:

• Order.
• Credit risk assessment.
• T&Cs.
• Manufacturing goods.   
• Delivering goods or service.   
• Invoice procedures.
• Dispute resolution management.   
• Collections procedures.

In the modern world, all companies need to remain customer focused while ensuring they get paid in full and on time. With a positive cash flow, maybe all companies will be able to pay all their suppliers on time and reverse the late payment culture we have in the UK.

Jenny Esau is managing director of Credit Management Group UK