82% of business failures are caused by poor cashflow management and credit control procedures, according to recent research by the US Bank. This negative cashflow situation will generally appear when your business starts to get paid late – making it vital to chase up any outstanding debts.
The impact of outstanding invoice payments is a significant issue for many small and medium-size businesses (SMBs), leading to cashflow problems, an inability to pay staff and suppliers on time and, in the worst instances, the total failure of the business.
In this culture of endemic late payment, it’s vital to have a credit control function set up in order to chase late payments – with clear procedures in place to ensure your business is paid on time.
We’ve outlined six key steps for setting up an effective credit control function.
1. Agree your payment terms and procedures up front
It’s vital that your customers and your credit control team both understand your credit policies and the terms and conditions that will apply to your invoices.
Have your payment terms written down in a formal credit control policy that customers must accept and sign-off on before any work is carried out. And make sure you include the basic terms in the small print of your invoices too so they are communicated clearly.
2. Regularly monitor your aged debtors
Use cashflow management software like Fluidly to keep a frequent eye on outstanding invoices and aged debts, so you know the scale of your debt issue and prioritise the important debts.
The traditional approach has been to categorise debts purely by age, looking at invoices that are ‘due now’, 30 days, 60 days, 90 days and older – but that’s not the most effective methodology.
Prioritise professionally by looking at the most at risk accounts (those with deteriorating credit, over their credit limit, in dispute, persistently late with payments, or those that missed a promised payment date), then chase based on the lateness of the account. If you have international debtors, don’t put these off as chasing may be a more prolonged process.
And set up automated reminders for your credit control activity, so you’re notified when calls or emails are needed for the most urgent invoices.
3. Check that customers have received your invoice
Seven days after issuing your bill, check in with your customer to ensure that the invoice has arrived, that the price and PO number etc are correct and that the invoice is being processed by their accounts payable team, ready for a timely payment by the specified date.
Tracking of email opens can be one way to do it, and this practice can provide an element of reassurance. But it’s good practice to check well ahead of the due date, so there’s time to correct any errors.
4. Remind customers when the due date is approaching
A preventative approach is always better than a curative one. So, seven days prior to payment being due, remind customers that payment will be expected on the due date.
This is just a polite reminder, not an email chasing a debt, so be sure to avoid any wording that could come across as pushy or passive aggressive. It’s a helpful message to your customer’s accounts payable team, that should get your invoice back to the top of the pile.
5. Chase up late payment every 7 days until paid
Set up a system where late invoices are chased at 7-day intervals once overdue. This keeps your credit control function organised and maintains the pressure for payment to be made.
Being polite and persistent does pay off, but bear in mind the impact your words can have on a customer relationship. A simple phone call may suffice, or it may be that a series of emails are needed. But always make sure you’re speaking directly to your customer’s finance team (not your regular contact), to speed up payment.
Escalate the firmness of your chasing as the debt becomes older, and when payment is beyond your agreed credit terms then refer customers to the terms contained in your credit control policy.
6. Automate your credit control chasing
The logistics of chasing a number of late-paying customers can start to eat into your finance team’s business time. So look to the latest technology to help you be more efficient.
39% of UK business spend up to 4 hours per week chasing invoices, a figure which can be substantially reduced if your finance team look to use software tools and in-app automation to reduce the credit control workload over time.
A more effective approach to credit control
By applying these six key steps, your business will make a real difference to its late payments and credit control efficiency. With a combination of clear policies, organised chasing and the application of fintech technology, you’ll soon see the difference to your aged debtor numbers.
Managing your credit control is crucial, as is distinguishing who your good and bad payers are.
Having a transparent view of both debt and cashflow puts your finance team in the most insightful position possible – allowing you to spot the issues, take action and keep the company’s cash in a positive position.