Credit Control for Small Business: Improve your cash flow in 6 easy steps

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A Guide To Good Credit Control

One of the quickest ways for a business to improve its cash flow is to implement a sensible credit control policy.

However, even if you do not need to boost your cash, there are still some very good reasons for looking at your credit control policy and the methods you use to manage it.

In this post, we are going to answer those familiar questions as to what is credit control, and outline best practice and some ideas around accounting software to make managing your debtors as easy as possible. We hope by the end of our guide we will have helped improve your cashflow through credit control.

In this article we will be looking at:

  • Choosing your credit policy
  • Thinking about your customers
  • Using systems to take the strain
  • Getting people to pay
  • Chase quick and chase often
  • The mental side of credit control

1. Choosing your credit policy

Some companies decide to use a generous credit policy to entice customers, others prefer to keep a tight rein on cash to ensure that they always have liquidity. Whatever approach you decide is right for your business, the important thing is to make sure you actively choose it, communicate with your staff, and then apply it in practice.

Possibly the worst thing you can do is to ignore the whole topic of credit control and just hope that your customers will be nice enough to pay!

Sadly, history is littered with failed businesses that only began to take credit control seriously when it was too late. If you use an invoice factoring company then they will often require sight of your credit control policy and will actively monitor whether you are operating it correctly.

2. Thinking about your customers

Although having a set credit policy is a good idea it would be wrong to apply a blanket approach. It is important to assess each customer and make sure that you are happy they can pay their account on time.

Large companies often do credit checks on potential customers before they allow an account to be opened and whilst we are not suggesting you do this with every customer you may want to think about it for larger accounts.

You may also want to give particularly valuable customers more favourable terms than newcomers and so your policy can be adjusted on a case-by-case basis. That having been said you do need to be aware that having a very complex series of terms for different customers can be confusing for staff so make changes sparingly.

Credit insurance is also a good idea for very large accounts and especially valuable where a single customer makes up a large proportion of your outstanding balances.

3. Using systems to take the strain

Applying a credit control policy does not have to be complicated and we would always suggest that you use your systems to take the strain. Almost all accounting systems will have at the very least basic credit control features and many (like Freeagent, Xero, Sage & Quickbooks) are exceptional in this area. But moving your business online you can send invoices electronically and with most payments now made online, 30-day terms are obsolete. Credit Control using Xero will streamline the invoicing process.

Make sure you have the correct invoicing address for them and double check any information you are given. A good source for this is the Companies House beta service.

Check whether your invoices need to be pre-authorised or can be sent directly to their Accounts Payable team. Normally, if it is the latter, they will have an email inbox (EG: that is specifically designed to receive invoices.

If they do ask you to send invoices to a certain email address, then make sure you do so as many businesses will have automated processing systems. That having been said it does not stop you cc-ing the document to the person who commission the work.

Ask your customer whether they use a Purchase Order (PO) system.

Very often larger businesses will not pay without a PO being issued and the number quoted on the invoice. Particularly disorganised (or disreputable) companies will not tell you this, they will just expect you to know but will not pay your invoices in the meantime!

When you set up the customer, decide what terms you are going to offer. Arguably the most common is 30 days but even that has its nuances.

30 days can mean 30 days from issuing the invoice, 30 days from the end of the month that you send the invoice or, less commonly 30 days from the date of order.

The number of days you offer is down to you and this is the important point; even if the customer comes back and says “we usually pay on 60 days from the end of the month” it does not matter what they usually do. It is your decision.

Imagine going into Sainsbury’s, getting to the checkout, and telling them that you normally pay 30 days from the date of invoice!

If you are not comfortable with granting credit for that long, then do not do it. (See our advice in the ‘mental side of credit control’ below).

Also, set a credit limit. Normally this will start off low and then be increased over time as your customer proves that they can pay their account on time, but it is quite normal to request cash with order for the first few purchases.

Make sure that the settings on your system reject orders that take the account over the credit limit and be resistant to promises to pay and of future ‘massive’ orders that rarely ever get placed.

When you have your settings in place, make sure you invoice promptly and check out the ‘aged debtors’ or ‘receivables’ reports on your system. These will tell you who owes what and how old the invoices are.

You can also use standard settings to automatically send statements and reminder letters, but we will counsel you that if you decide to go down this route you must make sure that payments are promptly entered on the system otherwise, you will spend your days fielding calls from unhappy customers telling you they have already paid!

If you work it right, you can almost devolve all your credit control functions to your accounting system which will give some time back and will make sure that you suffer less bad debts.

4. Getting people to pay

As we noted in the previous section, the starting point is to have your credit control policies reflected in your accounting system. You also need to be disciplined about invoicing quickly and allocating customer payments as soon as they come in. Then your Aged Debtors report will become your bible.

Run your report once a week and review it. Ignore all the accounts that are ‘current’. This will mean that they are less than 30 days from the date of invoice in the case of a ‘30 day’ policy. Customers in this category are not due to pay yet so can be put to one side.

Then check the customers who are the most overdue. You can see in our example (below) that City Limousines have an invoice that is 3 months overdue. The older an invoice is then the further to the right it will appear.

age receivable summary

An example Aged Receivables report from Xero 

The first thing to do is to make sure that you automatically send out statements at the end of every month. Many companies reconcile their supplier accounts to statements each month and then pay what is outstanding and so this will help, especially if you set your system to automatically send.

Then start chasing your outstanding items. Again, you can use your system to take the strain here.

Draft up a first, second and final demand letter and set these as standard letters on your accounting system.

You can choose to set these to automatically send or may wish to have manual control on these. With modern systems, it is a very simple matter to send these with a click of a button.

The biggest help when it comes to credit control is knowing your customer. For example, we can see in the Xero case above that Ridgeway University has an invoice that has just gone overdue.

Now we may know that Ridgeway always pays on time and if they miss a payment date then something has gone wrong. In which case it is time to hit the phones. Alternatively, we may know that Ridgeway always pays on time, but their Accounts Payable Clerk Betty is away on holiday until next week. In this case, we may choose to give them some leeway.

Knowing your customer goes a long way to reducing the number of bad debts you suffer.

If your customer does not pay after a reminder then you need to call them and ask why and here the important thing is; the quicker, you chase an outstanding invoice the more likely it is to be paid.

Experience shows that businesses that leave chasing debts until they are serious suffer more delinquent accounts and a higher amount of bad debt.

5. Chase quick and chase often

Manicure in a beauty business

After a while, you will get to know who pays and who does not. You will also get to know who is not paying because they are busy or disorganised and those who are hoping that you will forget. Interestingly, the customers will also get to know who chases.

Think about it this way; if you know that you are going to get a call from credit control if you have not paid an invoice within three days of the due date are you more or less likely to pay on time?

As your credit control function matures, you will also get to know which of your customers respond to what type of approach.

Some need to be coaxed, some need to be threatened and with some (particularly large businesses) it may seem as though nothing helps.

The trick here is to find the name of a particular person in Accounts Payable and make a new friend. It is unfair and illogical, but we can promise you that if you have a friend in AP your invoices will get paid quicker and fewer will be rejected because of a small breach of policy.

 6. The mental side of credit control

mental side of credit control

This is perhaps the most important and indeed the most overlooked aspect of credit control. Getting your head around credit control will make more difference to the cash in your bank than anything else.

The first thing to remember is that that this is your money. You are not asking for something special, just to be treated like any other business.

You pay your accounts on time and so your customers should too and yet so many businesspeople find it difficult to ask the customers to pay what they owe.

The newer you are to business the more you are likely to feel this way but do not worry, one or two large bad debts will soon change your mind!

If you are really having trouble then remember, set your policy, and then let your system take care of sending out reminder letters.

Another good way to quell your fears in this respect is to remember that while the customer has the goods that they have not paid for you are effectively financing their business. In short, they have taken a loan from you without asking.

Remember also that every pound owed by a customer is a pound that is not in your cashflow. You must pay your staff, you must keep the lights on, and you must pay your suppliers and you can only do that if your customers pay on time.

If all else fails, then outsource your credit control to a reputable specialist because they are experts the field and not emotionally attached to the process.

Your credit control policy is really a question of how much risk you are prepared to take versus the reward that you may get.

You may decide that you are going to offer 90-day payment terms for a huge, well-established business because it will produce more sales and you know they will pay.

Alternatively, you may take the strategic decision that you will put up with losing a few sales because you will be accepting less risk by not offering credit.

In short, your credit control policy is your choice and if your gut feeling is telling you something then it is probably right.

  • Credit control for small business – is not difficult if you are organised. By following these tips, you will be able to set up your credit control policy for your company as a whole and then amend it on a case-by-case basis where that makes strategic sense.
  • Use your online accounting software to maximum benefit to take the strain of storing each customer’s payment terms and produce statements and reminder letters automatically.
  • Then make sure you are organised and disciplined in the way you go about enforcing your policy and collecting cash when due.
  • After all, it is your money!

We hope you enjoyed our credit control guide. If you need help setting up your policy or systems, as your Accountants in London with expertise in online systems, we can get your software working perfectly so that you can relax, safe in the knowledge that your cash is being collected when it is due. If you would like to get started with a new credit control process, please give us a call.

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