This week I have a guest post from Andrew Stone of EC Credit Control.  Getting paid for all your hard work is vital to the survival of your business.  In this post Andrew talks about some of the causes for a blow-out in accounts receivable and what to do about it.

Businesses often call EC Credit Control for help when they are having difficulty getting their debtors to pay.  While sorting out the slow paying clients, we learn why it is that the debtors are dragging the chain. Almost every time we discover some, or all, of the following 7 deadly sins of credit management have created the situation.

1.     No clearly defined Terms and Conditions disclosed

In the past it has been common for businesses to do business on a simple handshake with problems experienced by either party.  As consumers have become wiser, and maybe a little more cunning, business owners, are now often faced with uphill struggles when they are running their business.  Whether it be getting paid on time,  jobs cancelled at the last minute, defects being noted some 12 or 24 months after the work was completed, or being able to pass collection costs on to the customer for late payment, without Terms of Trade being disclosed prior to work being completed, or services provided, you could be heading for disaster. 

2.     No formal Credit Policy

One of the biggest failings in business is that after the job is completed there is no follow up for payment, and before you know it, the invoice can be 3 months overdue.  By having a clear credit policy from the start of the relationship with your customer i.e. a completed credit application form, credit checking the customer and then a robust credit control process, a lot of potential problems can be erased.  There is no point you having done the job and then never get paid for it because you haven’t bothered following up payment.  It can be as simple as sending an invoice, then statement and then a reminder phone call.  If they still haven’t paid, then don’t be afraid to escalate.

3.     Have a Credit Policy but never use it

How often have we spoken to clients who have paid hard earned cash for a good solid credit management program and still have it sitting in the bottom draw, or better still, have it wrap up in the box it came in!  If you have a credit policy, then use it.  If you aren’t the right person to be implementing it then find someone who can as well as someone who enjoys doing these duties.  You would be surprised at how quickly your cash-flow improves when you follow a structured approach.

4.     Provide Credit when in fact you state you are a Cash Business

A cash business is exactly that – your customer pays cash as soon as the job is completed.  If you allow the customer to pay in 7 days then you provide credit which means you need to have a credit policy in place.

5.     Procrastination when dealing with slow payers

Too often we hear clients say “I will just give them one last chance” when the debt is 6-12 month old.  How many chances do you need to give your customers?  What communication have you had with your customer over the past 6-12 months?  If you are not talking to your customer then what chances do you have in collecting the money? Next to none I would suggest.  If your customer has not paid you then don’t be afraid to escalate it to the experts i.e. a collection agency, where most agencies work on a commission basis only on successful collect, meaning they take the risk.

6.     You believe everything the customer tells you

If I was asked to write a book on every line or excuse we have been told when it comes to asking for payment, the book would be an extremely large novel.  If someone says they will pay you, then get a date from them and the amount they will be paying as this gets a commitment (make sure you diary this date so you can follow up).  You don’t have eyes and ears around the place to ensure you have up to date information on all your clients.  There are some great products in the market which can assist you with this.  You can place an alert/monitor on your customers which will alert you of anything from change of business address, credit enquiries made against them or any adverse credit placed against them.  This service is very inexpensive as well as potentially saving you financial ruin as often you can be advised of customer issues prior to anyone else knowing.   

7.     Reliance on Trade References rather than an independent robust credit checking

So many times a business will phone the trade references written down on the credit application form and funnily enough receive a glowing reference.  Well of course you will as the customer is not really going to put down someone who will say negative experiences are they!  Unless you can control who they write down as a referee, relying on trade references can be very dangerous.  To ensure you receive a robust and independent picture on your new customer, we would suggest a thorough credit check is completed through a credit bureau.  This will provide you with important data i.e. identification of your customer, credit history (enquiries and any adverse data), on companies you will receive the correct legal entity of your customer, who the directors are, whether company forms have been lodged on time, as well as any adverse credit the company may have had in the past.  To enable you to complete such reports you will need to have your terms of trade in place and up to date to ensure you comply with current Privacy requirements.

If you would like to receive any further information on any of the above please feel free to call me, Andrew Stone on 021 400 116 for a no obligation meeting. If you prefer to drop me an email, my address is Andrew.Stone@eccreditcontrol.com