Cash in For Success: Lesson 5

"Credit control" is the discipline and function of controlling the amount of credit your customers are getting from you. It exists to ensure that your customers do not take more credit from you than you want to give them.

In this short article I just want to cover the bit of credit control relating to chasing for payment. So I thought it might be helpful to outline some ideas for what you could put in your credit control procedures. The specifics may be different for every business, but some of the general themes should be helpful to all businesses that allow customers to take some amount of credit. (Because of this, when I refer to 'you' doing things, please assume I mean the royal you, including the credit controller, bookkeeper, management accountant, finance manager, financial controller!)

1. Remind the customer about invoices just before due

If you are supplying products in volume, so that you are constantly sending out invoices, then you should send your customers a statement of invoices not yet paid, every month or maybe even every week.

On a set day every week, make a list of all the customers that will have invoices due for payment within the next 3-7 days (depending what you think is best). Give them a courtesy call. Now when I say a "courtesy call", that's exactly what it should be - courteous. You are not chasing for payment in this call, nor are you raking up the fact that they didn't pay the last one on time (necessarily). So the call should be pleasant and without pressure.

The purpose of the call is to, a) ensure that the customer has received the invoice; b) check they have processed it fully and there are no problems with it; and c) find out when they expect to be able to pay the invoice. Don't expect the customer to give you a firm promise at that stage (if they do that's a bonus, and something you can hold them to). You are just trying to get a rough idea for your cashflow forecasting.

2. Politely remind the customer about unpaid invoices just after they are due

On your credit control day each week, make another list of customers whose invoices have only just gone overdue in the last week.

This call is the same in tone as the last one - very easy going and polite - but this time try to get some sort of commitment to a payment date, preferably in a matter of days.

3. Chase by phone two or three times at weekly intervals

Your other lists will be made up of customers whose invoices are further overdue, and are also past the date they promised on the last call. At least at this early stage, there is no need to call a customer who last week promised to pay in two weeks time!

The next two or three times you call the customer about overdue invoices, you will be reminding them of promises made, and asking them politely to make new promises, but without making threats or warnings.

4. Warn them when an escalation step is about to be reached

By "escalation step" I mean a point at which you turn up the heat! That means either the point at which you start charging late payment interest, the point at which you make contact higher up in the company, the point you stop supplies to the customer, or the points at which you start various steps of legal proceedings (including formal insolvency/bankruptcy proceedings). That's probably roughly the order to step up in turning up the heat, and you should give the customer adequate time to pay between each step.

You will still be asking for commitments for payment dates at this stage, but at the same time you will be telling the customer when you want to be paid, i.e. immediately. Their promised date does not have to be accepted, and you will be giving them deadlines and chasing and escalating immediately deadlines are missed.

5. Always carry out your threats

Treat customers like children (in that regard only!). If you don't do what you say you are going to do (escalate to the MD or start legal proceedings), then you will never get customers paying on time, because they will never take your threats seriously.

6. Be fair and continue to love doing business with your customer

Be absolutely fair, legal and reasonable in everything you threaten and do. Unless they are very bad payers you may reasonably want them to buy from you again. So don't be rude or aggressive. But don't wimp out on collecting your cash either.

7. Finally, get things in writing

Always keep written records of each contact with the customer, including promised payment dates and reasons for late-payment. Always record what you have threatened, so that you remember to carry out the threat if necessary. And for the more serious escalation steps (stopping supply and taking legal action) make sure that you have informed the customer in writing, even if you have informed them in some other way.

All the best!

Cash In For Success: Lesson 4

Last time we were privileged to have Edwina Taylor, an expert in the field of credit risk, pass on some excellent advice on using credit reports, setting credit terms and credit control in general. I hope you found it useful.

We have two more lessons to go, as we look at how we can get cash in quicker. This time I want to look at two administrative issues that can trip you up, and next time I'll outline roughly what I see as a good credit control procedure. Then after that... well, I haven't thought that far ahead yet!

There is a kind of logic to the way I've been approaching this. Up to now we have majored on the issues to consider before you get to invoicing the customer/client - forecasting, credit limits, knowing your customer. This time we'll look at invoicing issues. Finally, we look at procedures once invoices have gone out.

What are the invoicing issues that can delay payments? Sometimes administrative issues can delay customers paying you. I have seen both sides of this - in other words, as both a supplier trying to get paid, and as a customer being asked to pay. And sometimes the administrative issues are genuine, and sometimes they are being used as delaying tactics. And sometimes it starts off with a genuine issue, which the customer's accounts team capitalises on to keep hold of your cash a bit longer. (Yes, it's your cash, not theirs, if the invoice is overdue. And seeing it as your cash will help you have the right mindset when chasing for payment.)

I just want to give two examples of where administrative sloppiness can cause delays in payments (actually, it may be better to call it "lack of attention to detail" or weak procedures, since "sloppiness" implies a criticism. Sloppiness is only a fair term where you know you should do something and you don't do it, or you can't be bothered, or don't see the point).

First, if the details on the invoice are incorrect then the customer is within their rights to query it and ask for a replacement invoice. An invoice is a legal document, with certain essential elements. If a customer may feel they will run into problems with tax (corporate or indirect/VAT) if they book/pay an invoice that is not legally correct. So they are entitled to an invoice that contains the right elements - whether that be a VAT registration number, the correct company name or specific wording in the description.

Some customers will be good at coming to you immediately to point the problems out and sort things out immediately. A lot of customers won't be so forthcoming, and won't tell you until you start chasing for payment. So make sure you know what an acceptable invoice would look like to the customer, and set your procedures so that you and your staff produce them like that.

Second, make sure you send the invoice to the correct person or department. Obviously this is particularly relevant to bigger companies, where the person you deliver the product or service to may not be one who processes the invoice for payment. If you don't send the invoice to the right person, address, department, email address (or you don't send it in the right format - paper or electronic) then, stating the obvious, the customer won't pay you because the right people won't know to pay you! And you potentially won't find out you made an error until you find they have not paid by the due date.

Make it a priority to make a relationship with a contact within the customer's finance and/or accounts payable team. People will normally go the extra mile for people they know and have built up a good relationship with, and they will normally be more honest too.

To sum up, if you have got all the invoice details right and are talking to the right person, then it will make chasing for payment so much easier.

And it's the chasing for payment procedures that we will come to next time.

Please let me know if any of these issues affect you, and if you have any tips of your own for getting round administrative issues with invoices.

All the best!