Businesses don’t fail because of a lack of profit…they fail because of a lack of cashflow! Director James Solomons writes up 5 simple tips to develop a credit control policy when extending credit to your customers via BRW.
A sale isn’t a sale until you’ve been paid.
Sometimes small business owners can forget this in their excitement about winning a new customer.
Rather than rely on “gut feel” or letting your standards drop because you’re keen to get the sale, institute a credit control policy. This is a set of rules and procedures to help you ensure that you extend credit to customers who are most likely to pay your account and deny it to those who aren’t.
KNOW WHO YOU’RE DEALING WITH
Before you extend credit, issue a credit application form to your prospective customer. This will gather all the details you need for a credit check and – if worst comes to worst – you’ll have them ready to hand over to debt collectors or lawyers.
The form should gather details such as the company’s ABN; the names of all the directors and owners; how long they’ve been trading; and whether their business premises are owned, leased or rented.
It should also ask for their desired credit limit amount and seek details of at least three trade references. Finally, the form should contain your terms and conditions of trade.
If someone makes a fuss about the credit application or gives you an excuse about why they can’t fill it out, ask yourself why.
CHECK THEIR CREDIT
How much effort you put into credit checking each customer will depend on your business model. If you make many sales for only a few dollars then it might not be worth credit checking each customer. But if you make several thousand dollars in sales to a few key customers then a credit check is definitely worthwhile.
Set a limit and decide anyone who wants credit over a particular amount has to go through a credit check.
First, ring their trade references and question them about whether they’re reliable payers (although remember this method isn’t foolproof).
Then get a credit report, which includes historical payment data, bankruptcy records, any lawsuits, liens and court judgements against a company, and a risk rating that predicts how likely they are to pay their bills. These can cost a few hundred dollars, so it’s really only worth it if you’ll be extending a lot of credit to the client.
SET CREDIT LIMITS AND TERMS
If you decide to extend credit to the customer, you need to work out how much. Obviously, the more creditworthy a customer, the higher the limit. You might, for instance, set the limit at an average two months’ worth of invoices for a very reliable customer. You need to think about your risk tolerance and how much you can afford to lose if the customer didn’t pay.
You’ll also need to set terms, such as how soon you will get paid after issuing an invoice. The usual terms are 14, 30 or 60 days. You should put these conditions into your accounting software so you’re alerted when credits limits are near or payment is late.
KEEP AN EYE ON EXISTING CUSTOMERS
Don’t just check out new customers. Keep tabs on your existing customers as well, even those who have been good payers in the past.
Use accounting software to see how much each customer spends with you and how promptly they pay. This can help you set credit limits for them if you haven’t already done so – and also to decide if you should do a credit check to be safe.
As customers spend more, you’ll also need to re-evaluate their credit limits.
Look out for changes in a customer’s payment behaviour, such as increased delays in payment or weak excuses for slow payment. It could be a sign that they’re in financial difficulty and a prompt for you to rethink how much credit you want to extend to them.
STICK TO YOUR POLICY AND FOLLOW UP
Be very careful about making exceptions to your credit policy. If customers can’t meet your terms you should consider doing without their business. It is, after all, better not to have the customer at all than to make a sale to them and then not get paid for your hard work.
Finally, follow up on any late payments immediately. Get a commitment from the customer as to when they are going to pay and if they are in genuine difficulty, offer them the opportunity to pay off the amount via a few instalments. If they miss their committed payment date then contact them straight away. The longer you leave them, the less likely you are to be paid.