The Institute of Credit Management (ICM) stressed the importance of effective credit control in no uncertain terms in its recent monthly cashflow tip to small businesses.
Published in collaboration with the minister of state for business and enterprise, Michael Fallon, the monthly tip is a reminder to small firms of the issues that directly impact on their bottom line.
In the most recent installment in the series, the ICM says: “Supplying customers without the certainty of getting paid is crazy. Use credit reference information sources to find out all you can – it could save you a bad debt.”
The ‘bad debt’ in this instance is, of course, debt run up by the non-paying customer – and not by your business itself – but if you cannot make the customer pay, it is still money lost by you that will never return to your business account.
However, protecting yourself against this risk is about more than just checking credit histories; at CPA we believe that credit control should be a joined-up process that begins when you take on a new client, and ends when the money is in your account.
Checking credit histories is a good starting point, followed by an agreement of clear and stated payment terms, so there is no argument later when an invoice is issued or a deadline passed.
You may want to limit your liability by setting a credit limit for each customer, and refusing to carry out any more work once this limit is met, until their account is paid.
And when an invoice is issued, effective credit control means making sure the details are correct, and that it is received and processed by the client without any problems.
These measures should make sure the process runs smoothly in most instances, but where an invoice becomes overdue, the credit control procedure comes back into effect, with a series of increasingly formal efforts to recover your funds.
Gentle prompting may be enough for many clients to settle their overdue accounts, while a letter from a solicitor or debt collector will hammer home a sense of responsibility to many others; and there is always legal recourse for the remaining few who think they can get away with not paying what they owe.
Overall though, any business should be protecting its income in the current economic climate, and in a small business – where each invoice is likely to represent a larger percentage of your total earnings – this is particularly prudent.