When you think of formal credit control procedures, you probably think of a dusty old office at the back of the building sending out invoices and reminders with big red letters.
This does happen, but effective credit control procedures are a critical business process that can make the difference between survival and insolvency.
With half a million businesses starting 2018 in severe financial distress and business debt in Q1 2018 up over 350% on the previous year, the numbers are stark: many UK businesses are having severe financial difficulties.
The business environment is deteriorating.
Brexit, interest rate hikes, business rate changes and the demise of stable industries like pubs, casual dining and the high street means we’re going to see more high-profile and many smaller casualties in the coming weeks, months and years.
At the heart of many problems is a bad credit control procedure. By not managing debt effectively, millions of businesses are exposed to often catastrophic risks.
Carillion – the Case in Point
When Carillion went bust, it took down hundreds of contractors with it. Andy Bradley, the MD of Flora-Tec, a horticulture company, told Dispatches: “They used every trick in the book to delay paying me.
We started on 45 days, then it was 65 days and, when they went under, we were technically on 126 days.” Of the half a million pounds Flora-Tec is owed, Bradley says: “I don’t think we’ll see any of it.”
The narrative that small subcontractors were railroaded into disadvantageous payment terms and then left millions of pounds out of pocket is accurate.
To say these subcontractors were powerless to at least mitigate these losses is not. At Red Flag Alert, Carillion had two red flags (a sign that insolvency is likely and imminent) for 12 months before insolvency – the signs were there if you looked in the right place.
The sad truth is that far too many businesses are simply not equipped with the best tools and tactics to help them avoid bad debt.
Credit Control Procedures
Broadly, there are two approaches to an effective credit control process: proactive and reactive. Reactive is the most widely documented and involves chasing up debts efficiently.
Proactive is less well documented but is equally if not more important – in practice it means building and managing a portfolio of the right types of customers who are less likely to default.
Let’s look at best practice for both credit management approaches.
Chasing payment effectively while maintaining great relationships with clients is a core component of credit control:
Have a Conversation
It’s easy to see late payers as the enemy; the majority of businesses that are paying late have legitimate reasons, and you’re probably not dealing with fraud.
Your client is probably having cash flow problems or is badly organised.
Don’t be afraid to pick up the phone and call your customer to discuss the overdue invoice, and see if there is anything you can do to help.
You can sympathise with their predicament and at the same time remind them gently that timely payment is important.
An amicable telephone reminder will at least give you an idea of whether there is an issue; hopefully, it will put you at the front of the queue when it comes to payments – all things being equal, someone who is phoning to check on outstanding invoices is likely to be paid first versus someone who sends an email.
The more seriously you take the invoice, the more seriously your client will take it.
Have a Watch List
In spite of your best efforts, there will probably be a few customers you want to work with that cause you a problem.
They could represent a large chunk of your revenue or just be badly organised, rather than severe credit risk.
The first step is to identify these companies and then make a plan. There are plenty of options for working with these problem payers.
- Send out payment reminders before the payment is due – you can cite recent late payments.
- Set a meeting with them to discuss payment terms and issues, gently reminding them that it’s important for your relationship that they pay on time.
- Put sanctions in place for late payment. Make sure these can be acted upon or you can make the situation worse.
Engage Your Team
Speak to team members in other business lines who deal with the client. Maybe the account manager has a great relationship and will be able to apply some pressure.
It isn’t necessary to put the account manager in a difficult position – they can tell the client they’re under pressure from your finance department regarding late payments and ask for a favour.
A good account manager will be able to approach this subtly. Even if they’re not prepared to chase the client explicitly, they might be able to uncover some useful information.
Before any problems crop up you should get your procedures right:
When you start working with a customer, take the time to build a relationship with the person who pays the invoices.
If that’s not possible, at the very least agree on a process for collecting payments. It’s a balance between being strong with your terms and fitting into their system; a good starting point is asking a few friendly questions:
- Who is my point of contact for payment processing?
- What information do you need to process invoices?
- When are your payment runs?
Depending on how acceptable this is, you may want to go back with your terms: “Our payment terms are seven days from invoice, can you place this on our file please.”
It’s a real balance, and there is no right answer as to how dogmatic you should be on terms. A good rule of thumb is to look at credit management norms within your industry.
And, of course, the more critical you are for the client, the more you can apply payment pressure.
Build an Operating Rhythm
The more you can foster good habits in your client the better and the best habit you can forge is for your client to pay you on time, every time. You can help make this happen.
- Make sure your invoice is laid out the same every time.
- Indicate everything clearly on your invoice with supporting notes and evidence of work completed.
- Send your invoice at the same time every month (where possible) and use the same format. If you send via email make the email look the same: you’re aiming to make paying your invoice simple and routine.
In certain circumstances, it makes sense to offer early payment incentives to clients.
When you’re dealing with serial late payers this is a viable tactic, although you need to be careful not to encourage late payment by offering discounts to late payers.
Again it’s a delicate balance. There are some good ways to frame early payment discounts:
- Standardise it across all invoices, for instance: If you pay within seven days you are eligible for a x% discount. You can add some friendly context, for example: Fast payment helps us to continue investing in the world-class service we provide.
- Reduce as much friction as possible from the payment process by making payment easy. Accept all forms of payment and make payment options clear on the invoice so paying your invoice is simple.
Have a Procedure
It sounds obvious, but sticking to a clear plan removes stress and ambiguity – build something simple and manageable to track that covers the key bases:
- Ask key questions at onboarding.
- Have a clear invoice run date.
- Send out regular reminders.
- Have a process for chasing payments.
It can be more complex if you’re dealing with large volumes, but as long as you have a process and stick to it you’ll be ok.
Find the Right Clients
The absolute best way to avoid the bad debt tied up in insolvency is to work with businesses that don’t end up insolvent – this sounds simple, and it is.
You can reliably predict whether a business is likely to become insolvent in the short and medium-term, based on financial indicators and what sector they’re operating in – some sectors are riskier than others.
You should build a sales list that takes into account the financial health of prospects so that you are bringing on clients that are less likely to pose credit problems in the future.
At Red Flag Alert, our database of 6.5 million businesses is an incredibly powerful B2B business development tool.
Not only do we look at financial health, but we also track dozens of other factors: you can use our data to build an ideal client profile and then use it to build a highly specific marketing list.
You could include:
- Financial health
- Search by key person
The data helps you zero in on the perfect prospective clients that are right for your business and are a low credit risk.
A large portion of unpaid debt comes from businesses becoming insolvent; once insolvency is filed it’s very difficult to get your money back. You’ll be joining a line of creditors at a debt collection agency who have to fight over scraps.
Insolvency doesn’t just happen to a business without warning; there are indicators for months or years beforehand that a business is trading in an unsustainable way.
There are hundreds of financial indicators that can be collated to give a very accurate view of the likelihood of a business becoming insolvent.
These indicators include performance, filed accounts, company CCJs, director background and sector.
Use the Right Tool
At Red Flag Alert our software gives every business in the UK an in-depth financial health rating based on 100+ factors and it is updated daily.
It’s the perfect tool to check that your clients aren’t anywhere near insolvency: as soon as even a small risk emerges we send out a notification, so you can act long before insolvency becomes a possibility.
We started Red Flag Alert in 2003, and over the past 14 years our algorithm has become more and more sophisticated. The health ratings can be used to:
- Accurately predict insolvency.
- Determine risk and set credit terms.
- Monitor your client’s financial health.
- Find sales prospects with a good credit control policy.
Red Flag Alert is the most detailed and comprehensive tool in the marketplace
- 6.5 million businesses rated.
- 20 million key decision-makers.
- Data from 10 leading data sources.
- 100,000 changes every day.
For a free demo of how Red Flag Alert can drive your credit control process, please get in touch with Richard West on email@example.com or 0344 412 6699.