William Cullen, Manager at Dunedin Advisory, offers advice on how to improve cashflow through effective credit control.
Good management of cashflow is vital for all businesses and is a key factor which, if not managed well, can see profitable businesses fall into difficult financial circumstances. Here’s four ways to improve cashflow via effective credit control.
Get it right at the start
Make sure you know your customer, have undertaken appropriate checks and obtained suitable references prior to allowing credit facilities. This includes obtaining guarantees that can be relied upon and agreeing upfront all payment terms. If in doubt always obtain upfront payment on order or delivery. Be aware of any scams that are operated – if something doesn’t feel right, it usually isn’t!
Where you have agreed credit facilities ensure you have the correct terms applied to and agreed with your customers from the outset. If you have not incorporated formal terms and conditions into your sales documentation you should do so seeking valuable advice from a commercial legal agent to assist you get it right. Any variation to your customer terms should be by prior written agreement with you and only where it fits with your requirements. A common error is having payment terms hidden away at the bottom of invoices. Given the importance of credit terms these should be front and centre and you should ensure your customers adhere to your terms.
Establish Debt Chasing Procedures
Most businesses will have procedures in place for chasing payment, however when was the last time you reviewed your process? It helps to make direct contact with the person responsible for making payments and using the most appropriate method of communication for each customer ie. email, letter, telephone – the old adage “those that shout loudest” is a key factor – ensuring you are firm, polite, immediately and repeatedly chasing overdue payments can make a difference in being treated as a priority.
Many businesses carry out their credit control on a monthly basis which can lead to some customers having additional time before they are chased for payment. A change to weekly or even daily procedure can make a big difference to your cashflow!
Introducing simple steps such as an email/text payment reminder to customers a few days before payment is due can see an increase in payments being made on time.
Understanding Customers and their Payment Cycles
Consider the timing of issuing invoices to customers, ideally this should be done straight away but might not always be possible. Many businesses make a single payment run at the end of the month. Ideally you should ensure your invoices reach customers prior to that month end run to avoid waiting until the end of the next month to be paid. Agreeing payment dates with your customer and knowing how their cashroom systems work can help you align your processes to maximum effect.
It is all too easy for aged debt to grow to an unmanageable level particularly with long standing customers who have historically been good payers. Knowing the factors affecting your customers is essential and knowing when it is a good time to stop supplies pending receipt of outstanding payments is essential. A common issue is further supplies being sold to a customer who is a notorious late payer. To avoid bad or irrecoverable debt the decision to stop supply may be the better option enabling you to concentrate your efforts on those customers who can pay.
You may have credit insurance in place as a protection however you will be expected to undertake appropriate customer diligence and have the appropriate credit control systems in operation as a part of fulfilling your policy terms.
Effective credit control can make a big difference to maximising your cashflow and is a fundamental cashiering role. If you haven’t reviewed your systems in recent times you should do – even the smallest change can make a big difference! Likewise, you should take full advantage of the credit terms offered by your suppliers, if you have 30 days to pay an invoice utilise these terms. Most internet banking allows you to set-up payments in advance leaving your account on a specific date. That way you don’t need to worry about remembering to pay the invoice later in the month and it can still be processed in a systematic, efficient way.