November 06, 2017
In today’s economic climate, the success of a company isn’t purely down to turnover or the number of sales achieved in any given month. This year we have already seen a number of large high street retailers fall into administration due to falling sales and changes in consumer buying behaviour. What we need to consider and learn from, is the steps we need to take when trading with new or existing customers and suppliers and how their credit worthiness can be monitored effectively throughout the business relationship.
Provision of Credit Risk information
Many businesses will have already invested or taken steps to check the worthiness of a prospective business either via a third party credit checking service or investing in credit risk software. This is a good first step to take in the credit control process as it helps to determine the amount of credit offered to a client and what payment terms should be offered; pro-forma, 30, 45, 60 day credit. The key question here is what happens 6 to 12 months down the line? For the majority of businesses nothing will happen. Pay performance is the key to a deeper knowledge about your clients to ensure the appropriate action is taken by monitoring your customers and how they are paying other suppliers. Reviewing clients on a regular basis, adjusting credit limits and payment terms are the first steps to help reduce your company’s exposure to bad debt.
Setting realistic goals/KPI’s:
• Reduction of debtor days
• Reduction of overdue debt
• Reduction in query/disputes
Formulating a chase policy
The first step to create a chase policy is to segment or profile customers according to historical payment performance and the amount of trade they provide. Depending on the size of the credit control/ collections team, do you have enough resource to run multiple chase policies for stricter and more frequent chases when clients fail to pay on time and a more tentative policy to chase those customers that provide 80% of turnover and pay within agreed terms? For those bad payers, why not introduce some form of pre-emptive chasing? Do your clients respond well to reminders & chase emails instead of making phone calls or a combination of both? This will determine the frequency and priority of how you chase your accounts. All business are different and the relationship with their clients can depend on industry, location and the type of goods/services provided, ultimately it’s down to the individual business to decide how far in advance to start the pre-emptive chase and how frequent the first and subsequent chases are done via email, letter or telephone.
Prioritising the chase
The next thing to consider is how you prioritise the chase, is your aged debt report up to date? Has all of today’s cash been allocated? The vast majority of a credit controller’s time is spent doing administration work which involves manually working through an aged debt report; this can often consist of going through lists of hundreds or thousands of clients and highlighting which clients to chase first. For those invoices now marked as a priority, we also need to consider any existing notes or promises in the accounts software or spreadsheet and to see if there are any disputes or queries outstanding.
Dealing with disputes/queries and pre-emptive chasing
Dealing with disputes and queries can be complex for those companies that have a large number of them where the credit controller needs to liaise with other departments. Crucial to this is having a Service Level Agreement (SLA) in place for the different types of dispute/query. Logging these in detail with the SLA and assigning it to a key stakeholder can help to improve the workload of the credit controller and reduce the average days to resolve the dispute. By pre-emptively chasing you can essentially record and respond to these issues in advance giving the company enough time to action and resolve the dispute before the invoice becomes due, this can have a dramatic effect on the company’s debtor days.
The key to any report is the quality of information. This can often be a problem if notes are recorded in disparate systems such as accounts, spreadsheets, emails and diaries. Ideally everything should be stored centrally, so that there’s no need to be looking at a large aged debt report, instead a transaction dossier report will show exactly what’s happened within a customer’s account and what appropriate action has been taken.
A promise cash report should detail exactly the amount that’s been promised, a note of who made it, when you can expect to receive payment and by which method, e.g. by BACS, cheque etc to provide an accurate idea of expected cash flow.
Whether you’re facing problems with bad debt or looking at ways to improve your procedures, having the information to make informed business decisions has to be a priority. For example, if you were to record or log each time a customer has disputed/queried an invoice because goods have been damaged in transit/ or the incorrect discount has been applied to the invoice. The information can then be used to question, what internal or external issues have caused this in your business. Do you need to retrain sales staff when quoting or do you need to review your dispatch services?
Apprentice Marketing Assistant
As Marketing Assistant, Lily assists the Marketing Manager in promoting both the business and its services. She updates the website and ensures the content is relevant, is involved in the strategy and implementation of digital marketing as well as producing and updating company literature.
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