...or is credit in control of you? Money makes the world (and your business) go round. So how do you ensure your clients pay promptly? We tackle the issue of credit control and offer five essential tips on how to keep your financial world turning.
Any business owner - sole trader, mid-sized or multi-national - knows the importance of credit control. There's a popular saying: 'Turnover is vanity, profit is sanity but cash flow is king' - meaning that no matter how much turnover your business produces, it means nothing unless you have a healthy profit margin and an efficient cash flow.
Poor cash flow is often the nail in a failing company's coffin. The Forum of Private Businesses sets out the stark reality of this issue, stating that 1 in 4 businesses go insolvent due to late payments, and poor payment practice costs UK businesses a whopping £20bn every year.
Cash flow has become yet more challenging since the global financial crash, but all too often, the process fails due to poor financial management or lack-lustre credit control. The good news is that, as an internal procedure, you have the power to fix it.
With the help of the FPB we set out five tips on how to improve cash flow and help get your business back in the black.
You set sales targets, so why not set targets for your debtors? Create a system or a timetable on how to chase unpaid bills. The FPB suggests the following procedures for companies that request payment within 30 days:
a) Send out invoices immediately
b) Send out a statement to arrive on day 27
c) Send a 'low' impact letter on day 33
d) Phone the customer on day 35
e) Send a 'medium' impact letter on day 38
f) Send a 'high' impact letter on day 41
g) Send a solicitor's seven-day letter on day 45
Good communication lies at the heart of effective financial control (see point 5 below) and we would suggest calling your customer at the first sign of trouble. This can often be much more effective than letters and has a more personal feel to it - use this to your advantage and try to create a positive vibe. After all, if the client has the potential to become long-term, it's well worth striking up a positive relationship from the outset.
2) Timely Invoices
Perhaps the most important action point, and the one over which you have the most control, is timely invoicing. Ensure the invoice is sent immediately. It should take top priority as some clients will take the full 30-day period to pay; so the sooner you send the invoice, the sooner you get paid. Workspace operators with ongoing clients would also benefit from encouraging a direct debit arrangement. Consider offering an incentive to urge clients to set up automatic direct debit payments every month.
Ensure your invoice is crystal clear with a breakdown of services and any necessary references, and be sure to send it to the correct person. Also, payment terms should be agreed in advance and clearly stated. Ideally, provide detailed payment terms with your invoice that states any credit periods, and details of interest charges on overdue accounts.
4) Credit Check
Workspace operators accepting a potentially large contract should credit check the new client and/or request credit references. If you don't subscribe to a credit check service, you could carry out an online credit check using a reputable firm for a small fee.
5) Create Relationships
One of the best ways to ensure clients continue to pay on time is to establish a good relationship. Workspace operators are in a prime position to do this, as they have regular face-to-face time with clients and have the potential to create a positive, personal relationship with individuals. Finally, don't forget to thank customers who pay on time!
What other credit control tips do you recommend?