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Credit management – A sale is a gift until it’s paid for (part 2)

If your business model doesn’t allow you to be paid upfront…….…..read on

Successful credit management should be front and centre for all businesses, irrespective of the wider economic circumstances.

We’re still coping with a massive contraction of credit across the world which makes your own credit management much more important.

These blogs set out a comprehensive framework for credit management which will help you to lower your risk and put more money in your bank.

Understand your route to getting paid

Every business should be compelled to sell to a large, multinational organisation every now and then just to be reminded of the pain you have to go through sometimes to get paid.

“We can’t accept an invoice without a signed purchase order”

“What’s your vendor number, we can’t set up a new supplier account without a vendor number”

“I’m sorry but all invoices over £50,000 have to be signed off by two directors”

“Our accounts payable department is in the Netherlands”

We’ve all heard these, or similar comments, and they drive you mad, but forewarned is forearmed.

With your customer, create a flowchart of their system for receiving, authorising and paying suppliers’ invoices.

If invoices over £50,000 require two signatures, then send your invoices more frequently for smaller amounts.

If you need a purchase order and a purchase order number then make sure you get one.

Get the email addresses of your buyer and of the accounts payable person so you can send your invoices electronically and ensure they can’t say they haven’t got your invoice.

A cautionary note: this type of work is not usually natural territory for sales people, so training might be required and it’s another area where the chief executive might have to lead from the front so that others follow.

Debt collection procedures

Invoices and statements

Debt collection begins with ensuring you have sent the correct invoices, as soon as possible, to the right person – preferably electronically.

Many businesses send statements to clients each month. If you wish to do this, then also try to do it electronically to save both time and money.

80:20 rule

It’s likely that 80% of your credit risk lies in 20% of your ledger. Therefore, make sure you can identify the risky debtors and concentrate on them.

Ensure your Aged Debtor report is in order of the largest debtor down to the smallest, instead of in alphabetical order.

It’s good to talk

The most effective credit control is done by telephone, putting consistent pressure on your client to pay.

Better still if you can effect a “Pincer Movement” on your client, with your credit controller talking to their accounts payable team and your sales people talking to the buyers.

Again, if it comes to it, your chief executive should call theirs if there is a problem that can’t be solved through routine channels.

The last resort

If all options for getting paid have been exhausted then stop selling to the non-payers because you’re just pouring good money after bad.

If you feel it’s worthwhile going to court then you have to issue a written warning that this will happen in not less than seven days; this is called a Letter before Action. Then, you have to see it through, otherwise your threat is not credible and the client has won.

There are many legal services you can use to process your legal claim and an internet search in your local area will produce a decent choice.

I hope you never have to get this far with debt recovery and if you need any practical advice, please call us on 020 7384 6800.

 

Michael
@michaeljcaustin