Most companies can improve their credit control processes in one way or another, but some simple credit control improvement examples give you a much clearer picture of where to start.
Here are three basic credit control improvement examples, detailing several of the issues that crop up time and time again in businesses’ credit control audits.
1. Credit checks
It’s good practice to run background credit checks on all new clients – but do you know what to look for in the credit report you receive?
Most will include a basic risk summary, with a score out of 100 (think of this as a quality score – a higher score means lower risk), a recommended credit limit, and a plain English statement of whether you should approve the client.
But there’s a key difference between the ‘credit limit’ and the ‘credit rating’ values.
The ‘credit rating’ gives an idea of how much credit the company is likely to need in any 30-day period, whereas the ‘credit limit’ tells you how much you should allow them to owe you at any one time.
For example, if you invoice at the end of the month on 30-day terms, that means the client could run up another 30 days’ worth of debt before paying their first invoice.
If this is a concern, take partial payment or a security deposit upfront, or issue the first few invoices on 7-day or 14-day terms until you have more confidence in the customer’s ability to pay.
Invoice promptly, and be clear about the terms on which you do so – that might sound obvious, but even a relatively small oversight can have a big impact on your cash flow.
For example, if you invoice on 30-day terms as soon as an order is completed, you should expect payment in full within 30 days, right?
Compare this with leaving your invoicing until the first day of the next month – a simple admin task to ease into the new month – and then invoicing on net 30 EOM terms.
That can actually give the client until 30 days from the end of the month to make the payment – potentially another 61 days from the date the invoice is issued, if you send it out on the first day of a new 31-day month.
In the extreme example of July-August, that could theoretically mean you complete an order on July 1st, invoice for it on August 1st, and are not due to receive payment until September 30th – instead of July 30th, if you invoiced immediately on 30-day terms.
While this is a deliberately extreme example, it highlights just how much of a difference your cash flow can experience for a relatively small adjustment to your payment terms, and why it is so important to have clear payment terms and conditions in place from the outset.
3. Debt recovery
Debt recovery is the part of the process where nearly everyone could do better – for most people, taking action against a customer who is having difficulty paying you can feel very awkward.
But the longer you leave it, the less chance there is of getting your money back, especially if they declare bankruptcy or insolvency in the meantime.
A professional debt recovery organisation can actually increase the amount you receive, by applying the permitted penalty fees and interest to the invoiced amount.
For example, on a debt of £100 paid 30 days late, you can charge statutory interest at the Bank of England reference rate plus 8%, with a fixed penalty of £40 on top (this rises to £70 on debts of £1,000-£10,000 and £100 on debts of £10,000 or more).
The interest only comes to about 67p, at 2.3p per day, but the total you could recover is therefore £140.67 – and you can also make the debtor pay reasonable debt recovery costs too, under modern-day legislation.
You should ideally set out all of this in your terms and conditions, to make doubly sure you can enforce it later, but it’s clear to see how on some overdue invoices, taking prompt action can significantly increase the amount you recoup.