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Top tips for creating an effective credit control policy

One of the most important elements of a successful business is the ability to maintain healthy levels of cash flow. In effect, this means establishing effective methods for dealing with both debtors and creditors.

Although there can be any number of reasons why a customer is not settling its bills on time, your business will undoubtedly benefit from implementing and enforcing a robust credit policy.

Who Is Your Debtor?

When dealing with a new customer, it is vitally important to verify the information they provide to you. Check their company or personal information, run credit checks and ensure that you have the correct telephone number, address and email for them. If you are dealing with a business, ask them to provide references from other organisations.

Remember, that in the worst-case scenario, you may want to obtain judgment against your debtor. If they fail to pay the judgment debt, you will need to know about their financial circumstances in order to consider the best way to enforce the debt. Although there are ways of finding this out post judgment, it is preferable to know your customer’s circumstances before they become a debtor, rather than after they become a problem.

Terms of Business

Your credit terms should be rigorously enforced and should be regarded as part of your contract with your customer. You must ensure that your terms are evident on your invoices but you should also consider incorporating them onto your contracts so that there can be no confusion as to when an account becomes due.

Terms and conditions relating to credit could include:

  • Details of when payment is due
  • The right to charge interest for late payment
  • The right to suspend deliveries or cancel contracts if payment is overdue
  • The right to take any goods back if you do not get paid for them

Your terms should be reviewed and, if necessary, renegotiated with customers on an annual basis. During each year, monitor the payments your customer makes, the time they take to make them and how many follow-ups are needed.

Ensure that your sales people are well informed as to your terms: favourable terms for low-risk customers may be a good selling point. Do not extend credit to anyone until they have agreed and signed terms and conditions with you.

Categorise Your Customers

Depending on the nature of your business and whether you are dealing with businesses or consumers, you may have identified several categories of risk depending on creditworthiness, trade references, past history and other factors. If a customer is deemed to be high risk or is known to be experiencing cash flow difficulties, insist on a deposit or cash on delivery. Consider asking for a promissory note, which is a contractual agreement that determines how a debt is to be paid over a period of time, whether with or without interest.

When Payment Is Due

When invoices remain unpaid, it is important to be proactive. Contact your customer to find out why the invoice has not been paid, rather than letting it lie undealt with. It may be that an invoice has been lost or is incorrect, so ascertain the issues and deal with them early on. Maintain good lines of communication with your debtor and be firm but understanding. A client is more likely to pay a creditor who has been firm but pleasant. Often, payments will be made in order of priority. If you have been proactive in chasing your debt, you are more likely to be first in line, regardless of the age of the customer’s other debts.

If you need help with recovering debts, please contact Martyn Knox or Roger Pratt

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