When you start a business, much attention will be paid to how you will raise capital to fund those early costs and make your idea a reality. However, maintaining healthy finances is needed for the entire lifespan of your company. This is why cash flow is a fundamental part of your operations – and not having it can spell disaster.
The problems associated with poor cash flow will soon be evident. Businesses will find themselves struggling to pay their employees. Suppliers will start chasing for non-payment of invoices. And the number of bad debts will be on the increase. Late payment is a substantial contributing factor to business failure.
However, the solution doesn’t always come down to external investment and filling what could be a short-term funding gap. A better use of time, and resource, is to improve (or create) your credit management processes. You need systems in place that are super-efficient because you should know what is owed to you at all times. And have the means to collect the payments.
Turning your sales into cold hard cash is the primary objective. And that requires more work than merely invoicing your customers. Effective credit management looks beyond this to prevent late payment or even non-payment.
In this blog, we have detailed the best steps you can take towards excellent credit management, with the result of boosting your cash flow.
- Introduce a credit policy
- Carry out credit checks
- Have a sound accounting system
- Send reminders
- Have a final port of call
Introduce a credit policy
Before you can effectively manage your credit and make sure your customers pay you on time, you need to set on the terms under which this will happen.
So, start by introducing a credit policy aligned to your business objectives and apply realistic credit limits on a per-customer basis. It’s vital that you adopt a positive credit management culture across your business – and buy-in from the sales team, customer services and finance is imperative. This means that you have a consistent approach, ensuring all customers are treated fairly and with a full understanding of the policy.
You need to have well-tested billing procedures in place with strict instructions that are followed and adhered to. They should also be reviewed regularly to make sure your order to cash process is efficient. And a robust dispute management procedure is a must; not everyone will pay their invoice without a battle.
Once you have crafted these procedures, it is also worth making sure your customers are fully aware. This leaves no room for misinterpretations and manages expectation about when payment is required and what will happen if it is not given.
Carry out credit checks
When you are bringing new customers on board, you do so with the trust that they will pay you as agreed. While this will be true in most cases, there may be rare occasions where a customer does not have the financial means to pay you.
To prevent this from happening, you should carry out credit checks as a precautionary measure. A credit check provides insight into a customer’s financial status, such as whether they are in any debt. This can help you establish whether you believe the customer will be capable of paying you and whether you are willing to accept the risk of providing a service to them.
If you are carrying out credit checks on your new customers, you must let them know and get their consent. Generally speaking, a credit check won’t affect credit scores or history, but some people may prefer not to be subject to one.
By carrying out credit checks, you will have immediate information regarding the affordability of your customers. This will prevent you from signing contracts with anyone who simply will not be able to repay you, as well as save time chasing invoices.
Have a sound accounting system
Every business should have an efficient accounting system that allows them to track their income and outgoings, monitor payments and manage their finances. Your accounting system will also make your credit management easier.
Today, all accounting systems are digitised. This allows you to send invoices electronically, so you can be assured that your customers have received them, and receive electronic payment to simplify the process. An efficient system will also enable you to track individual payments to see who has or hasn’t paid.
Your system may also allow for automation so that you can send automated reminders and chasers to customers who are approaching or have passed the payment deadline.
By having a robust accounting system, checking payment against your credit management procedures is simple, so you can quickly see what’s outstanding and what stage of the process is due next.
Send reminders
While many customers may action an invoice as soon as they receive it, others may need a prompt. In some cases, invoices may get forgotten about or lost down the chain of command, leading to unintentional delays. This is why sending reminders are essential to ensure the customer is aware of the payment due.
As part of your credit management process, you need to outline at which points you will send reminders. Depending on how long the payment window is, this could be a week before payment, the day before or even both. It is best to align your reminders with what suits your business and its customers best. Similarly, you may want to send reminders out after the deadline has passed to give customers a chance to pay up to the point where you need to take further action.
As previously mentioned, you may be able to automate your reminders under your accounting system. It is worth noting that occasionally, there may be technical issues where a customer receives a reminder after paying. Hence, you need to be prepared to solve these where necessary.
Your reminders could come in the form of emails, post or calls. Often, early reminders may start as emails before turning to more formal letters or calls as the situation gets more serious. You should outline this as part of your credit management plan. If you are struggling to get an answer, a call to the customer may be favourable as it gives them a chance to explain their side of the story and an agreement to possibly be made.
Have a final port of call
For many of us, chasing payment can seem time-consuming, awkward and frustrating. However, it is crucial to remember this is owed to you for work you have done. In extreme cases, poor credit management can lead to debt and bankruptcy, so you need to ensure you are getting paid.
Under the credit management process you implement, you need to have a final port of call. This is the last action you will take if a customer continues to avoid payment. By having it in place, you will prevent your company from giving up on chasing payment and give debtors a consequence to their actions and no way to ‘get away with it’.
For most companies, the final action will transpire as some form of legal action, such as taking the customer to court or sending in a debt collection agency to recoup the owed funds. This is an action that few will want to take, so it is essential to reserve it as a very last step.
If you choose to use a debt collection agency, you will need to employ one to carry out this service. It will then be up to you to decide when to take action and instruct the agency to collect debt on your behalf.
Get advice
Effective credit management is a prerequisite for any business that wants to ensure they are paid on time. By having the right processes in place, you can create a culture that clearly indicates to your customers what is expected, while avoiding the unfavourable consequences of reduced cash flow.
If you are experiencing cash flow issues, whether stemming from poor credit management or not, it is essential to act swiftly before the problem spirals out of control. There are many short-term finance solutions on the market to maintain cash flow even in trying times, allowing you to get back on track.
At Pegasus Funding, our team of experts can talk you through the options available to ease the challenges you are facing.