Manage Your Debtors to Improve Cash-Flow
Posted 15 November 2011 - 10:38 AM
A quick guide to managing your customer credit, and making sure you get paid on time.
Cash flow is critically important to all businesses. But when it comes to new start-ups and small businesses, it can often be a matter of life and death. Ensuring that you have a firm grasp of your outstanding debtors is absolutely essential if your business is to survive and prosper. Providing goods or services to customers who fail to pay when due can have devastating effects on your business. Particularly if you are relying on their payment to pay your own suppliers. Therefore, it is extremely important that you put in place measures to try and prevent this from occurring right from the start.
But before you start panic, there are several simple measures that you can put in place which will have a big impact:
Before you offer credit to a new customer
Perform proper background checks
It’s vital that before you extend credit to anyone, you do a full and thorough background check. Always confirm their business address, telephone number, email address, company registration number and VAT number if applicable. These details should all be checked against public records such as those at Companies House. The simplest way to collect this information is to use a “Customer Account Application Form”.
Perform Credit checks
It is always advisable to check out new customers with a credit referencing agency before extending them credit. There are loads of agencies out there, all with varying fees. Some of the more well known ones are Dun & Bradstreet and Experian. Many people are put off by paying for credit checks, but it is a small price to pay when compared to the potential costs of bad debt.
Make sure you can afford to offer the length and size of credit limit
Always be realistic about what you can actually afford to offer. It can be tempting to offer long credit terms to try and attract more sales, but those sales won’t help you unless you can pay your bills on time.
Managing your existing debtors
Always send out invoices with full payment details as soon as the order is confirmed.
This may sound simple, but it is surprising how many fail to do this. If your customers are paying you electronically, make sure that you have full bank details on the invoice. Always confirm that your customer has received the invoice and that there are no queries with it. Ideally do this in writing via email so that you have a paper trail.
Send a reminder and statement shortly before the payment is due
Always be sure to send out a statement of account and a reminder to your customers shortly before their invoice is due for payment. Ask them to confirm that they have received all the invoices on the statement, and that there are no queries.
Issue late payment warnings followed by phone calls for all late payments.
If a customer fails to pay by their due date, it is very important that you send out warning letters stating that further action may be taken if the debt is not paid within a set time. This warning should be followed up by phone calls requesting the payment be settled immediately.
Refer to a debt collection agency, or file county court proceedings.
If you are still unsuccessful in collecting payment from a customer at this point, it’s time to enforce your credit terms. Don’t be fooled by excuses from your customer (such as; the cheque is in the post, we didn’t receive the invoice etc). If you have followed the previous steps, and are still at this point, then the customer has no real excuse. In many cases, even the mention of debt collection agencies or county court proceedings will be enough to scare the customer in to paying you what is owed.
Once you are following the steps in this quick guide, you should be well on the way to running a far healthier and
lower risk business. As a way of helping our clients, we offer template documents for debtor management, and can even give assistance in collecting late payments on your behalf. For more information please see our range of
Fixed Fee Accounting packages.
We hope this guide has been useful, please stay tuned for more articles on managing your cash flow.
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