Wednesday 18 November 2009

Cash In For Success: Lesson 3




By Edwina Taylor

Despite the UK Government's interventions and the succession of recent interest rate reductions, there seems little sign of a mellowing in the commercial banks' attitude to lending to businesses. Forecasts claim that it will be 2011 before any meaningful return of confidence in the banking system. If access to external finance remains difficult to obtain, businesses will need to be vigilant in their management of working capital during 2010. All reasonable care needs to be taken in the management of trade credit.

Sound credit management can minimise the risk of a business being landed with bad debts. Obviously that risk can never be completely eliminated, even in benign trading conditions, but in these cautious times, the aim of the exercise must be to ensure that the credit offered reflects the clients' ability to repay it.

SME's must consider taking elementary steps to protect against the risk of bad or late debts, so: -

  • Consider what methods of payment you are happy to accept from customers. Retail businesses in particular need to be flexible here, but credit & debit card systems offer protection to the seller, which is less affected by subsequent changes in the customer's circumstances.
  • For non-retail transactions, consider setting a threshold beyond which an extension of credit will be conditional upon a satisfactory credit reference check.
  • Decide in advance what your firm's policy is to be with regard to late payments. Many firms incorporate interest clauses in their payment terms, but regardless of whether you do this, any business in the UK is entitled to charge statutory interest, currently set at 8%.
  • Ensure that all invoices are sent out promptly, with the name and address of the business clearly and accurately stated along with your payment terms. Many firms believe that charging interest on late payments acts as a further incentive to customers to pay promptly.
  • Keep an eye on outstanding invoices and chase debtors if payments do not arrive when expected.

What if payment is not forthcoming?

  • Send a letter to the debtor, stating or implying the consequences of a continuing failure to pay. You can always use a solicitor to write on your behalf, but there will then be further costs incurred.
  • You could sell your invoices to a factoring company or approach a debt recovery firm to chase the debt for you. This will relieve you of the work of pursuing your debtors, but will have costs attributable to the collection.
  • Court action can recover debts. In the UK, for debts of up to £15k you will go through the County Court who will allocate the claim to one of three different streams, including the small claims stream. You may be able to recover collection costs if you win.
  • If all else fails, then, for debts over £750, an unpaid creditor can initiate formal insolvency action.

Chasing Payments

Most businesses have heard the old chestnuts: - "the cheque is in the post", and "may I have a copy invoice". These are generally delaying tactics, but don't let it rest, and don't be afraid to insist on immediate payment.

Be diligent with processes - follow through the system of chasing debts, perhaps using a similar pattern as follows:-

Courtesy call the customer enquiring as to whether there is a reason for payment not being made;

Deal with any disputes on the order - asking for payment of those items that are not disputed, advising that the disputed items will be sorted out;

Where there is a cash flow problem agree a payment structure;

Keep records of all conversations and correspondence, email, fax, letters;

If all else fails put the company on STOP until you have been paid.

Remember unpaid bills are a way of easing your customers' cash flow problems at the expense of yours.

Credit Where Credit Is Due

Customers are the lifeblood of any business, but it is worth remembering "a sale is not a sale until it has been paid for". Extending credit is always risky and any business is taking a chance of not being paid, ultimately resulting in loss of profit, valuable time wasted in chasing the debt, and unwanted expense in taking legal action, only to be left with the bill being left unpaid.

Extending credit is like lending customers your own money. Would you advance a cash loan to a complete stranger? I guess your answer is no, but that is exactly what you are doing when you provide goods or services on credit.

Credit checking is widely used, but is it being used correctly? How do you evaluate how safe a business is?

Do you really understand the credit report?

Do you scrutinise the figures or just merely check that there has been no recent adverse activity?

Do you have a financial expert analyse the report?

Do you take up trade references?

Do you offer every customer the same credit terms?

Do you talk to the customer's Bank?

Do you check out the Directors' personal credit ratings?

If you have answered NO to one or more of the above, your business may be at risk. Risk Assessment has become the way forward. Most businesses carry out some enquiries, but the majority are insufficient.

Remember Turnover is Vanity, Profit Is Sanity, Cash Is King

Taking the risk out of extending credit is a vitally important and prudent move to adopt. See our 10 tips to help limit the risk of advancing credit accounts: -

1) Conduct a credit report for each new customer preferably backed up with a financial analysis;

2) Ensure that you ask for 3 trade creditor references and take them up;

3) Ensure you ask for a Bank Reference and that you speak to the bank;

4) Obtain an annual credit report for all customers;

5) Review all customer credit limits annually and do not be afraid to amend the terms or limits;

6) Have clear credit control policies which are "cast in stone" irrespective of the customer;

7) Include a Retention of Title (ROT) clause in your terms and conditions. It can be worth having a Solicitor draw it up for your own protection;

8) If you are supplying a Limited Company, consider obtaining a Personal Guarantee (PG) which will afford protection and allow a claim to be made against the Directors personally if the company folds;

9) Set the credit limit YOU are comfortable with not what the customer is asking for. For orders in excess of the credit limit the balance may be paid for COD or prior to delivery;

10) Ensure customers understand your credit terms and get them to sign the terms and conditions confirming their agreement.

Before you open a credit account be absolutely certain that your company understands your customer's payment system. Some companies will not allow payments to you until you are established on their system. Some companies insist on 90 day payment terms. Be sure that you agree in writing with your customer that payment is to be on your terms, not theirs. It is worth noting the day your customer runs the "cheque run" especially larger companies, government departments, Councils etc. Many only have one "cheque run" each month. You must ensure invoices are sent at least 1 week in advance of this date.

How can Frost Risk Services Help?

With our help, you can:

  • Know who you are doing business with;
  • Find out who controls that business;
  • Review their financial situation;
  • Check their credit-worthiness.

You can check the credit status of any business online with Frost Credit Checking 24 hours a day - See www.frostcreditservices.com - It's easy to use, updated daily, and comes with a solvency assessment written by a licensed Insolvency Practitioner if required. Whatever your interest in a business, we can give you bespoke reports and solvency assessments. We'll look at your options and help protect your interests, if need be.

For further information on this or any other debt related matter please call Edwina Taylor on 0845 260 0101 or 07515 334 251. Email edwinat@frostbr.co.uk

www.frostbr.co.uk Offices in Croydon, Dorset,Manchester, London

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