Is your Credit Management up to scratch?

How to reduce Bad Debts and increase Cash Flow 

Easy solutions to improving late payers

Good credit management is about managing one’s debtors to maximise cash flow at the same time retaining your clients.   A very important aspect to successful credit management.

In a perfect world a business would send out invoices and statements and the money would just roll in.   Why does this not happen and what can be done to fix the problem?

There are a number of good business practices that can be used to collect your money faster.

• Post invoices promptly, don’t wait until the end of the month, invoice daily or weekly
• Send out statements as soon as possible after the end of the month. In the mail by the 3rd working day at the latest
• Reduce your terms of credit. Have casual accounts payable 7 days or 10 days after invoice with your regular accounts 20th of the month following
• Put a due date on your invoices e.g. "This account is due for payment on 10 February 2010"
• Use statement stickers or hand written post-it notes on overdue accounts
• Charge interest on overdue accounts
• Don’t invoice until the supply or service is complete (i.e. the job must be finished)
• Telephone overdue accounts 4-7 days after due date, don’t leave until the next month
• Only give credit to credit worthy customers

These are all common sense rules that many businesses don’t put into practice.

Why is this? Credit management is not hard but many sales people and managers are afraid they will upset customers by asking for your money to be paid.

Whilst it is true that nothing happens until someone sells something it is also true that accounts must be paid on time for the business to function effectively.

How does a business marry these important functions together?

This decision needs to be made by senior management in conjunction with the Credit and Sales teams and formalised in the company’s credit policy.

Once set the policy must be adhered to by both Sales and Credit.

Sounds simple but putting into practice is harder as there are always "special customers". You know them, they buy large, get the biggest discounts, never pay on time and usually make the most noise.

However, this is a management decision, is it worth the risk of large exposure accounts with low margins that never pay on time and may end up as a bad debt?   Management must weigh up the benefit of the sale versus the effect on the cash flow and on the bottom line if the account goes bad.   The unfortunate fact is that many managers don’t do this and don’t look past the sale and hope the customer will pay.   Don’t blame the Credit Manager if it ends up as a bad debt.

There is a very fine line but strong credit management will usually produce better profits than giving extended credit.   Remember "a sale is not a sale until it is paid for" is as true today as it was 50 years’ ago.

• Know who you are dealing with (are you dealing with an individual, partnership, trust or company?)
• The squeaky wheel gets the oil (if you don’t make a noise you won't get paid)
• A leopard never changes its spots (a bad credit risk is always a bad credit risk)

The best indicator of what a man or woman will do tomorrow is what he or she did yesterday.

Written by

Gary Whiteside CreditAdvice.co.nz, Credit Management Solutions for Business