Effective credit control is the best method for any business to maintain cashflow. However, there are a number of ways to avoid potential problems. Some are common sense, but all come under the umbrella of good practice. They all apply to whatever size your business might be, and whilst clearly the sums due to a large business will be higher, the effect of non-payment for small business is the same, if not worse, even though the sums will be smaller. There is often a conflict of interests between the salesman and those required to collect payment for the transactions, which the salesman enters into. This applies just as much where a small supplier is both salesman and credit controller. In either case, it’s important not to be blinded to all other considerations by the value of the deal. As the old saying goes, if it seems too good to be true, it may well be. So, do you know your customer and can you establish their ability to pay before committing to any sale in the first place? Do they have a good payment record previously? Surprisingly, even well run and “savvy” businesses continue to provide work, materials or services to companies who either have a poor record, or indeed still owe a considerable amount under previous invoices. Often the rationale is that “I cannot afford to turn away the business”. However, if you aren’t going to get paid, the truth is that you probably cannot afford to do the business.
There are some simple rules: If you don't know your customer, do not allow too much credit. Be a little suspicious, especially if it is the type of service or supply, which tends to be repeat business. If they haven’t come to you before, why have they now? It could be because the previous supplier has refused to continue because of non-payment. If your customer is younger than normal is there any possibility of obtaining a guarantee from someone else, for example, a parent. If the parent refuses to guarantee then it's a pretty good sign that your prospective customer is not able to meet their bills as they fall due, and you'll be getting yourself into difficulties if you trade with them. The same applies with new companies – will the directors provide a guarantee? If not, you probably have no effective means of obtaining money from a company with no assets. In any business, even with the regular customers, the trade “chatter” is worth listening to. You may hear that someone is in some difficulties before it becomes apparent from your dealings with them. You and your staff need to be vigilant not to allow large sums by way of credit if there are rumours about the financial viability of any of your customers. They may be placing an order with the best of intentions, but if other creditors are pressing or other factors intervene then your invoice may be the one that is left unpaid. Even the best run businesses who take precautions may run into difficulty obtaining payment.
It is at that stage that credit control comes into its own. Efficient credit control will find out early that there may be problems, as well as indicating to any customer shuffling their payments between various creditors that you are one of the creditors who will be pushing for payment first. It is an undeniable fact that those who push hardest get paid first, but equally a credit controller who can achieve a rapport with the customer will achieve the best results, as long as they know when they are being “played”.
Finally, if all else fails, it is no good leaving the matter with a credit controller where it is evident that a customer is either unwilling or unable to pay. Legal action will always work best when it is used efficiently as a complementary component to effective credit control. Speed is always of the essence in any collection situation and the skill for any creditor is to know when your own efforts have reached their natural conclusion and it is time to increase the pressure. A determined debtor will prevaricate, make offers to pay “shortly” and break those promises, simply because they believe that the matter will go no further. The longer you hold on to it, the more secure they will feel. Graham Penn, Partner and Head of Recovery of Goods CentreThis article is provided for general information only. Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.