Effective credit control doesn’t just happen; it is the result of careful planning.
In business we have all heard the saying ‘Cash is King’ or ‘A Sale is not a Sale, until the money is in the Bank’, unfortunately many businesses forget this, as they are more concerned with upsetting or loosing a customer.
It is not all about the customer wanting you, it is also about you wanting that customer, believe me, there are many customers out their you don’t want. I can near enough guarantee most businesses can think back to certain customers that have cost their business more money than they have received.
So, what’s it all about Graham, how do you get the perfect customer? It is not about the perfect customer , it is about you educating the perfect customer on what you expect. Look internally at your own Sales Ledger, you will know the customers that pay you on time, a question you should be asking yourself is, why are they paying you on time, and why are your other customers not paying you on time. You cannot always blame the customer!.
If you were herding sheep into a pen 50 metres away, what would you do to accomplish it? You would guide them and cajole them to where you want them to go, it’s exactly the same with your customers, OK, they are not sheep, but the principle still stands. You need to guide them, cajole them, educate them in the way you work and what you expect in return for the products or services you have provided, if you don’t, what do you think will happen, yep, the same old customers will still not pay you on time.
Good Credit Management is about your relationship with your clients. Social Psychologists say that the three greatest fears are death, public speaking and asking for money. You know what I mean, when you get the gut wrenching feeling when someone owes you money and they are not paying you. Businesses would rather do without the money than risk a confrontation with a client and unfortunately the bankruptcy statistics are evidence that this is a serious issue. Many businesses instead go for the additional funding rather than taking a look at the internal cash flow mechanisms of the business. If you give credit you need to have strong credit management procedures and policies in place. In my profession I come across many businesses that don’t have a clue of what their Debtor Days Outstanding (DSO) is. Every business that gives out credit should be using this Key Performance Indicator.
There is a strong chance, depending on the industry you are in, that 25/40% of your customer base will probably pay you late, but you don’t have to be a statistic in the late payment culture if you put in place simple credit control procedures and be disciplined in your actions.
Most businesses have delayed payment of an invoice at some point, often past the due date. It is very tempting to do this especially if your sales are down and there are no consequences for paying late.
So with this in mind, look at where a substantial amount of cash may be tied up on your sales ledger, otherwise known as account receivables or debtors. All successful businesses rely on money flowing through the company at a certain rate to meet the businesses commitments. If this flow of money is sluggish, then you have a cashflow issue.
Credit control is not an exact science. It takes dedication, hard work and discipline to set up and maintain a credit control function in line with your business commitments and future operations.
So, you have built up a client base and you are finding out that your business could do more to control your Sales Ledger, your debtor days are getting out of control and proper procedures have not been adjusted to consider the business environment we find ourselves in now, as opposed to three years ago when credit was easy to come by.
Let’s say for argument’s sake you have not thoroughly checked your customer’s credit worthiness. If this is the case, do it now. Credit check every company you deal with, regardless of whether they are a long term customer or not; any business in any environment can suffer a cash flow crisis.
There are reputable organisations that can assist with credit checking and the monitoring of your client base, and this action needs to be taken seriously to avoid the traps that the unwary fall into. Look at the industry spread you have. Are there customers in a particular industry that control a large percentage of your sales ledger? If so, consider spreading the risk in case the large debtor falls into arrears. What would be the worst case scenario for your cash flow? What actions could you take to reduce that risk?
The issue of late payment is a serious one. Invest in good credit management and stop thinking the Back Office is just a cost. The Accounts Department, small or big are your PROFIT Protectors, without it you will fail in business if you give credit. A truer saying has never been said “If revenue is the engine that powers your company, Credit Management is the oil that keeps it flowing”.