The pressure of insolvency and its impact on mental health is very real For Directors, especially those who've built their...
What is Credit Management?
Running a successful business is, for the most part, doing what you do well and ideally doing it better than your competitors, or at least doing it in a way which sets you apart from them. In an ideal world, this would be all that’s required in order for you to establish your business and make it grow. You do good work and get paid for it.
Unfortunately, doing great work, or selling great products, is only half the battle. Taking an active role in making sure you get paid for those goods and services is absolutely essential and it is a task all businesses need to make time for. For accounting purposes, money owed to your business is an asset, however, you can’t buy new equipment, pay staff wages or pay your building rental with money you’re owed. So it’s important to have a system in place to make sure that invoices you’ve raised are settled in a timely fashion. Credit management or credit control refers to just such a system and is an essential part of maintaining a healthy cashflow and shielding your business from insolvency.
Credit Management vs. Offering No Credit
If making time to monitor and manage your debtor’s ledger seems like too much paperwork, you might consider not offering credit at all. After all, if you insist on payment up front, there’ll be no outstanding balances to chase. In principle it’s a sound idea, but in practice, it could cost you business.
Like it or not, most businesses with a good relationship with their suppliers agree credit terms of one sort or another, with invoicing terms of 7, 14 or 28 days being typical. If you offer no credit to your customers, but your competitor does, then it’s likely you won’t get the sales. This is different if you are running a business were customers expect to pay for their purchases straight away such as shops or restaurants.
Credit Control and Cashflow
Getting credit management right is essential to your cashflow. Your business may well get credit terms from your own suppliers, which allows you to supply the products or services to your customers. Properly executed, a cashflow plan will ensure that you always have funds available when your own bills become due, largely by controlling your outgoings, being aware of when you’ll need funds and making sure your customers pay on time.
While you can, for the most part, control your outgoings, late payments from customers or even non-payment is an unfortunate fact of life for business which offer credit terms. Part of a good credit management plan therefore is being careful as to who you offer credit.
As mentioned above, if you offer no credit then you risk getting no business from potential customers who expect it. However, too much credit to the wrong customers and you risk being paid late, or not at all for goods and services you’ve already paid to supply. There should always be a little flexibility built into a cashflow, but there’s only so much you can do if too many people don’t pay on time. Credit management therefore is a balancing act between risk and reward.
Credit control isn’t just about chasing payments
They say “An ounce of prevention is worth a pound of cure” and in the context of credit management, this rings especially true.
While the most simple form of credit management involves regularly checking to make sure customers have paid their invoices on or before credit terms expire and contacting them if they’re late, there are strategies you can implement which might well prevent this from being necessary in the first place.
- Check customer creditworthiness prior to extending terms
- Monitor customer’s credit files for changes in circumstances
- Being wary of unusual customer behaviour
- Incorporate late payment clauses into agreements
- Be firm but fair in the face of customer demands
If you’re careful about who you extend credit to, how much you offer, and you keep your customers under review, you stand a much better chance of spotting and preventing potential issues long before you have an unpaid invoice to chase and before your business becomes another victim of supply chain insolvency.
Is your cashflow suffering due to lack of credit control?
Even the most carefully managed cashflow can go wrong from time to time. With margins being tight, it can take only a few unforeseen problems to crop up in order for a lack of ready funds to become a threat to your business.
The collapse of Carillion earlier this year, for example, caught many construction firms by surprise. Firms who, in order to secure Carillion contracts were reportedly expected to provide 90 day credit terms and who, can now expect to receive as little as a penny in the Pound on their unpaid invoices. Something which few firms would have predicted or accounted for and which many would struggle to survive.
While most cashflow issues are thankfully less extreme, there may come a time when a credit management process isn’t followed or isn’t sufficient, when a lack of debtor payment grows beyond what your cashflow can tolerate.
At Lines Henry, we offer advice and a range of solutions for businesses in financial distress. Insolvency Finance may well be suitable to help deal with an overstretched cashflow, alternatively Sales Invoice Finance might also be suitable to help you release the value of your debtor ledger.
To discuss these and other possible solutions to your business’s credit management concerns, get in touch with Lines Henry for a free consultation.
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