Cashflow is the lifeblood of every business. Current estimates indicate that approximately 90 per cent of business failures are the result of poor cash flow.
Having an effective credit policy and collection procedure in place is one of the most vital facets of owning your own business. When it comes to customers who are unwilling to pay on time it can mean the difference between business success or failure.
The lag between the provision of a product or service and receipt of payment can create significant burden for business, particularly if you have slow payers among your data base.
Dun & Bradstreet data reveals that business-to-business trade payments have escalated to their highest level since 2001. Businesses are now waiting an average 55.8 days to receive payment. This means they are being denied access to their own funds for almost four weeks longer than the standard term.
Credit is a necessary part of business growth, the way it is managed will determine whether it boosts profitability or is detrimental to the business. Important considerations are your credit policy and collection procedure.
CREDIT POLICY
Important questions to ask yourself when formulating your credit policy:
What kinds of terms should I offer? Standard terms are usually payment within 7, 14, or 30 days after the invoice date. Don't be afraid to set your own terms, such as 50% deposit upfront or COD. Other ideas might be discounts for payment upfront, pay on invoice date etc.
TIP: The longer the term gives more reasons for invoices to go missing or be forgotten. Shorten your trading terms. Remember also to include your payment terms when quoting or attempting to make a sale. The more you mention this point, the more likely you will be paid on time.
How would I like to be paid? Your business should make all payments available or importantly, offer the ways in which your customer wants to pay. When considering this, be sure to keep up to speed with the bank fees and charges for transactions such as credit cards, surcharges may have to be included for some. For larger bills look into finance options. We use premium funding to allow our clients to spread our invoices over a longer period of time to releive their cash burden.
TIP: Always include all the available payment methods on the invoice. Bank account details for direct debit, include an area where customers can place their credit card details and return.
How should I deal with late payments? Try to be, within reason, as accommodating as possible. Your policy should be clear to all customers and staff. Consequences should be metered out when deserved and a set time frame for legal action for delinquant debtors. This may take the form of withholding goods/services, not processing orders and in some cases, legal action.
TIP: Be consistent. An important part of the debtor process is re-training your customers and clients. Late payments will be pursued and action taken when appropriate.
COLLECTION PROCEDURE
What to do if your client hasn't paid you on time. You need a clearly defined collection procedure.
STEP 1: Send a statement, asking for payment. You may wish to create a “Reminder” or “Final Notice” template letter, you may find you'll use a lot of them!
STEP 2: Telephone the customer and remind them of the debt. Ask them if there is a problem. If there appears to be no barrier for payment, ask them to settle the debt by a specific date.
STEP 3: If there is a cash flow problem, try to arrange a payment plan that accommodates both parties and be reasonable.
STEP 4: If the problem is recurrent then it's a good idea to review the customer's credit terms. Keep an eye out for patterns.
STEP 5: If the debt is not settled in the given timeframe, you may need to take legal action against the client.
Remember to deal with situations as they occur. If you implement an effective credit policy, credit application and collection procedure, you're helping ensure the financial security of your business venture.