In the second part of our ‘effective credit control’ series, I’ve focused on how reducing your debtor days – essentially getting paid quicker – is important for effective credit control.
As mentioned in the previous blog – Effective credit control: the importance of knowing your customer - getting paid on time for the services you provide can mean the difference between profit and loss and during a recession poor cash flow management can stop your business from growing. Reducing your debtor days will improve your cash flow and as a result, you’ll be able to invest in other business opportunities that support your growth.
Taking steps to reduce your debtor days
You now have all your information, checks and terms in place and have started doing business with your new customer. Now it’s time to invoice them. Invoices should break down exactly what you are charging for, with as much detail as possible. Make sure your payment terms are clear and display a prominent “pay by” date. You can do this by using a larger font size, making text bold or using a contrasting colour to draw attention to the date. You don’t want your customer trying to claim they didn’t know when they had to pay! Setting out different payment options and contact details also removes the “I didn’t know how to pay” excuse.
However, let’s consider a situation where your payment date has passed, and the payment is not in your bank. This is when your credit control department kicks into action and emails, follow-up phone calls and final demands are next on the agenda.
Depending on the relationship you have with your customer, and they won’t all be the same, the way you approach their non-payment may differ. For those usually trustworthy customers you may use a more “friendly” approach – ask if there are any issues with the invoice, or whether there was a problem with the goods/services provided. If it is a cash flow issue with your customer, you may be more open to resolving the situation amicably and offer to accept an instalment arrangement, allow them to pay extra on future orders until the historic debt is paid, or other such resolutions.
When it’s time to take more stringent measures
If this approach doesn’t work, or if the customer does not respond to your messages, then it’s time to consider the next steps and start to introduce more stringent measures. This could include stopping all goods/services you provide them with until the arrears are cleared and threatening them with legal action if they continue to fail to pay. Pointing out the further potential costs for your customer if you are left with no alternative but to instruct an external company to take over the recovery process may encourage them to resolve the matter before such costs are added, or at least encourage them to open a dialogue with you.
Credit control conversations don’t always have to be confrontational, however, your customers must be aware of the consequences of failing to deal with due payments. It is money that is owed to you, and you should not be indirectly financing your customers’ businesses.
Do you need to take legal action?
If your customer does identify a dispute concerning the goods/services you have provided and gives a reason for non-payment of the invoice then all correspondence should be responded to clearly and with evidence where possible. If the matter cannot be resolved after you attempt to come to an agreement, then you must then decide whether to continue with further action and send it to an external company.
By removing yourself from the recovery process at this point, some space is created between yourself and your customer. If a customer has been ignoring you hoping that you will just go away, sometimes merely a demand on the letter headed paper of a Solicitors firm is enough to prompt payment, or at least instigate contact to resolve the situation.
I’d always advise clients to stay proactive and keep up to date on their customer’s financial situation and learn about their industry to see if they could be heading into any challenging times where payments might be delayed. This will allow you to speak to your customer ahead of any potential issues to make sure you are at the top of the payment list and take measures to ease their strain. Prevention is always better than trying to find a solution.
Credit control and reducing your debtor days is a vital part of any business. If done effectively it ensures a smooth cash flow supporting your business. If it is not prioritised, you could quickly find yourself with a ledger full of sales and an empty bank account! Our Debt Recovery team are always happy to provide a debt analysis of your business and include suggestions on how to reduce your debtor days and improve your cash flow.
If you missed the previous blog in the series you can read part 1 – the importance of knowing your customer here.
Disclaimer: Anything posted in this blog is for general information only and is not intended to provide legal advice on any general or specific matter.