Welcome to the first of a series of cash flow columns where we introduce you to various products and techniques to manage your company’s cash flow. Here’s a checklist looking at the steps all businesses can take to better manage, and control, your cash flow.
If you’ve done the hard work and billed your client, the last thing you need is slow payment playing havoc on your own cash flow. Setting up a system to ensure your debts are paid on time should start before a contract or terms of trade even begins.
Putting these controls in place from the start and taking the appropriate steps in a disciplined manner shows customers you mean business, so they’re more likely to pay on time, every time. Here’s a few pointers for setting up credit controls, managing debtors and improving the chance of payment when things go wrong.
Setting up Credit Controls
System: Have a system and process in place and stick to the process.
Automatic payments: Encourage payments to be made automatically to your bank account.
Credit checks: Use references and reports to check credit rates for new customers, in particular those placing significant orders from the outset. Such checks should identify any new customers with bad credit experiences in their past, so these can be monitored.
Stick to terms: Set terms of trade at the outset and enforce them. It’s much easier to follow up on slow payers if your trading conditions have been clearly laid out from the beginning.
Rank debtors: Debtors should be ranked by value and risk, and their accounts monitored accordingly. This is particularly important for new customers.
Managing Debtors
Follow up: Follow up on all slow payers.
Decision-makers: Those responsible for the transaction should deal directly with your customer’s decision-makers. Monitor collections and follow up if payment schedules are not met.
Reminder letters: Automatically send 30, 60 and 90-day reminder letters. Insist on your trade terms being met.
Personal contact: Go and see them if payments are not made on time, and don’t leave the premises without having a commitment for payment.
Keep in touch: Don’t rely on one visit. Follow up, including regular telephone reminders, if necessary. Again, don’t finish the call without obtaining their firm commitment to make a payment. And follow up again if it is not paid on the promised date. Or better yet, undertake to pick up the cheque on the day promised.
Review: Review credit ratings and available reports regularly to check any changes in buying habits and increasing levels of debt. Customers with whom you have done business for years are often the greatest credit risk, because no one thinks to check on them.
Check your systems: If you don’t get invoices out promptly it encourages customers to delay payment. Delivery systems should also be checked. For instance, do you keep signed delivery dockets so you can prove delivery? Efficient systems avoid arguments later.
Check growth: As part of the monitoring and review process, keep an eye on customers undertaking fast expansion. An expanding customer may help your sales, but rapid growth also puts pressure on the customer’s management and may increase risk. Make sure they continue to pay promptly.
Special arrangements: Be careful when handling any requests for extended credit. Check out the customer’s ability to survive, and make a commercial decision based on the available information.
Customer Difficulties
Warning signs: Look out for warning signs of customers that may be experiencing difficulties. Sometimes they are not easy to recognise. For example, while the sales team may want to claim credit for any increase in a customer’s ordering, the new business the customer is giving you may be the result of other suppliers removing credit facilities. Industry gossip about a company’s financial position is often surprisingly accurate.
Commitment: It’s important to get difficult debtors to admit they have problems in paying and to then obtain a firm commitment for an amount to be paid against the account. When possible, get this in writing, or write to them confirming their commitment.
Stop supplies: If accounts are not being paid, supplies should be stopped. This should be part of your credit system. You can then discuss the situation with your customer, and perhaps reach an understanding regarding payment for past supplies and conditions for new supplies.
Legal action: Don’t put off sending professional demand letters or threatening legal action.
Collection program: Discuss your policy and the credit limits you are applying up front so customers know you are serious about your collection program.
Debt collectors: If necessary use a professional debt collector and be prepared to go to court.
Some business owners are concerned about taking such a disciplined approach to debt collection as they are afraid of upsetting and losing the customer. But if customers are not meeting their payment obligations, they’re not worth having. You should be using your debtors to fund your own business, not your customers’.
* These tips were supplied by business and financial services firm, HLB Mann Judd, Sydney.
