A sale is not a sale until you have received the cash. Agreed?
“Cash is King”. Not Shakespeare, I grant you, but probably quoted just as often. Profitability is one thing but it is a lack of cash in the bank that is the most common form of business failure – even for some highly profitable businesses. Indeed, a sale is not a sale until you have received the cash.
Most businesses provide credit to their customers, in order to develop their customer base and to attract sales. This delays receipt of cash and increases the risk of not getting paid at all for goods and services already provided. Debts may not be paid on time due to a variety of reasons, including queries and disputes, inability to pay, and sometimes simply due to poor practice and procedures.
Even if poor credit control is not terminal, it still leads to a reduction in profitability due to interest costs and reduced cash flow to invest elsewhere in the business. After all, you are not in business to provide extended credit – otherwise you’d be a bank! A good credit control process will help reduce the risk of bad debts by monitoring levels and age of debt, and taking actions to collect the money once it is due.
What does good credit control look like?
A good credit controller will:
- Monitor trading activity against set credit limits
- Get to know the payment patterns of customers
- Pick up early warning signs
- Develop a relationship with the customer’s payment function, in order to discuss any issues and to negotiate payment
- Stay in control of the customer relationship, knowing when and how hard to push
- Initiate appropriate actions to recover debt. This may include the following:
o Escalating to a more senior person, such as the FD
o Putting an account on stop
o Taking legal action
- Use the phone – chasing letters are fine, but speaking to customers works best
- Liaise with others in their own organisation – it is important that operations and sales staff know whether their customers are not paying up. They can also help collect!
There are, of course, others ways to collect debt. Whilst working for an international conglomerate in the mid-‘90s, our Moscow office was visited by a group of masked men with Kalashnikovs who wanted their money and they wanted it then. That method worked too, but I wouldn’t recommend it!
There are other methods that might suit some businesses, such as debt factoring, credit insurance and collection agencies, which can be used in conjunction with traditional credit control methods. However, this results in loss of margin and it can be more cost effective just to hire a good credit controller instead.
This blog has been written by David Coombs, Client Finance Director with Tectona.
To find out more about improving your cashflow – or if you would like to discuss any of our other blog topics – please contact Mark Nicholls on 07818 407061 or Email.