Large Business

Good credit management is about managing your debtors to maximise your cash flow and at the same time holding on to your clients.

In a perfect world your 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:

• Ensure you have a well written Credit Application. This must include clear readable Terms of Trade (not in font size 8 please) and a clear concise Deed of Guarantee (Personal Guarantee) attached to the credit application.
• Insist that the Deed of Guarantee be signed by all applicants. Ensure that signatories have assets to cover the amount of credit being given and check that assets are not being held within a trust. If so, ensure the trust is the guarantor and the trustees have signed the application and Deed of Guarantee. Also ensure that you are given a copy of the trust deeds to ensure the applicants have authority to take on debt. Have a formal procedure for those clients who won’t sign the deed.
• Have a clear formal Credit Policy that both the Sales Department and the Credit Department agree with and can live with, if you don’t have this you will inevitably have trouble.
• While working together (Sales staff & Credit staff), ensure that the sales role remains separate from the collections role if you wish to retain your customer. When any difficulties have been resolved the sales team can retain their working relationship with little or no strain.
• Elevate the position of Credit Manager up into the ranks of senior management. Who else in the company is responsible for such huge amounts of the company’s assets?
• Have your Credit Manager reporting to senior management (preferably not the Accountant or CFO), but reporting to the same person the Sales Manager reports to.
• Invoice regularly throughout the month, don’t wait and invoice everything at the end of the month.
• Post invoices promptly, don’t wait until the end of the month. For a large business invoice daily and post out invoices daily. There is a direct correlation between the number of working days after the end of the month the final invoices are sent out and the amount of cash collected that month. The final invoices should be sent out no later than 1-2 working days after the end of the month, earlier if possible.
• Send out statements as soon as possible after the end of the month. In the mail by the 3rd working day at the latest. Again, there is a direct correlation between the number of working days after the end of the month the statements are sent out and the amount of cash collected that month.
• If possible, reduce your credit terms (may not be feasible for a business with a large number of accounts). Have your regular clients pay on the 20th of the month following the month of invoice, but change all other clients over a period of time to 7, 10 or 14 day terms or pay cash. Often it can be more cost effective to offer a discount and move smaller customers to cash accounts.
• If your accounting system allows, put a due date on your invoices, e.g. “this account is due for payment on 10/6/2010”, not “this invoice is due for payment on the 20th of the month following the month of invoice” or “this invoice is due for payment in 10 days”.
• Use statement stickers on overdue accounts. Make sure the account is actually still overdue and the client hasn’t paid. (This may be impractical for firms with a very large number of statements).
• Regularly telephone overdue accounts 4-7 days after due date and don’t leave until the next month. Start slowly and build it up. With a large ledger it may be more time effective to post many of your smaller overdue accounts letters and follow up with phone calls to account holders with balances over a specific sum and clients that prefer to receive personal contact.
• Only give credit to credit worthy customers. If a new client has been involved in a previous company that has gone into receivership or liquidation etc then don’t give the new company credit. If you are forced to do business with this customer then put in place extra security measures to compensate for the extra risk. If a client has gone bankrupt there is a 50% chance that they will go bankrupt again. Remember that a Deed of Guarantee (personal guarantee) is only as good as the assets behind it. Many personal guarantees are not worth the paper they are written on.
• Have a formal policy for dealing with “special clients” (e.g. they buy large, get the biggest discounts, never pay on time and usually make the most noise). 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? This is a management decision; 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, hoping the client will pay. Don’t blame the Credit Manager if it ends up as a bad debt.
• One of the most important principles with a large ledger is to be consistent in what you do and follow up as soon as practicable (you are training your clients into good payment habits).

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 clients by asking for “your” money to be paid.

While 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.

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 30 years’ ago.

If you do nothing else at all, remember "The Golden Rules of Credit"...

• Know who you are dealing with (Are you dealing with an individual, partnership 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.

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Remember, knowing 'how' to do it and 'doing it' are two very different things.

If you want help in improving your debtor’s ledger or implementing the above, please phone Gary Whiteside or one of our consultants.

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