Debt recovery is one of the most common reasons members get in touch with our legal team and while it may seem like a daunting process, it’s a problem easily solved by putting in place various monitoring and invoicing systems. Having robust credit control policies and procedures in place will help to decrease the percentage of both non-paying new customers and non-paying existing customers, effectively creating a more efficient workflow for generating cash flow within your business.
There are two types of debtors you’ll come across. The first applies to those customers who have a genuine grievance and tangible reason for not meeting payment terms. The second is the repeat offender who offers no reason for non-payment and repeatedly goes back on promises to settle their bill. While the first may be settled with a simple conversation, the latter should be monitored and potentially have their credit removed altogether.
Questions to ask yourself while building your credit control system
- Which customers do you accept and under what circumstances?
- Which should you no longer accept and when is the exit period?
- What does your invoicing process look like?
- When do you conduct a telephone reminder?
- When do you send a reminder in writing?
- When do you engage in a debt collection agency?
- When will you start legal proceedings?
What determines a robust credit control system?
- Establishing the customer’s credit rating in advance
- Regularly monitoring customers for credit risks
- Maintaining good customer relations to encourage timely payment
- Detecting late payment patterns in advance
- Preventing bad debt from arising
When a robust credit control system is implemented correctly this directly contributes to profit increase due to the lowering of late payment and improvement of cash flow. Once cash flow has improved within a business recovering from patterns of late payment, there will be higher liquidity that can be used for investment and acquisitions. Furthermore, these results contribute to a more positive and professional company image.
Top Tip: State your terms of business clearly to customers
Outline your own set of terms and conditions with regards to payment and method of payment when dealing with customers. These terms should be reasonable and should make customers aware of any consequences relating to late or non-payment. Make your customers aware of these by ensuring they are accessible to all and that all contractual documents make it clear that these terms apply.
We recommend frequently revisiting these terms, shortening the terms of payment to suit the contract and your cash flow requirements when possible. Your customers and clients should be aware of when this credit control process starts and ends, following which you should take appropriate action as soon as possible thereafter.
Actions may include:
- Issuing a formal letter before action
- Issuing of claim form
- Entering judgment
- Enforcement of judgments
- Bankruptcy/Insolvency proceedings
What are the options for limiting credit risks and updating customer credit data?
Acceptance system: Using a customer’s credit information to determine whether to accept a new customer or not.
Monitoring system: Checks entire portfolio for continuous insight into existing customers and suppliers.
Invoicing system: Invoices can be sent manually or automated with reminders synced and aligned.
Bookkeeping system: All received payment and payables are booked into this system which provides insight into cash flow and receivables risk.