Published on 1 July 2011 by Tony Groom
Many companies are risking their own solvency and ability to carry on trading because they are not managing their debt collection proactively nor are they setting credit terms with their customers. And as a consequence they are suffering from late payments, or worse write off due to bad debts.
While it may be understandable that difficult trading conditions prompt a company to try to be accommodating with regular customers in order to keep their business, this is plainly counter-productive when the amount they are owed keeps on climbing and starts to affect their own cash flow.
The problem is compounded when they extend credit to customers who turn out to be a bad risk because they have failed to carry out prior credit reference check before extending a credit facility. If the company to which the money is owed is itself borrowing money under a factoring or invoice discount facility then it risks the invoice being recourse as a bad debt after 90 days. This means that the facility is reduced by the amount borrowed on the recourse invoice which in turn has an adverse impact on cash flow.
At its root the problem is the company’s own credit management where many companies do not have a robust system in place from the start.
There are several key things that should be done and the first is to do a credit check on any new customer it is proposing to take on. It should also regularly review its existing customers’ credit levels at least once a year.
While a company may still decide to accept credit risk on a new customer, it will at least be able to assess the value of the credit that should be extended to them if it has checked their status first with a credit agency.
Many companies also fail to manage payment of an invoice until after it is due. That is the point at which they may discover that the invoice had never been approved for payment in the first place or that there was another problem, which the customer may have failed to raise, for example that the order was not fulfilled exactly as required, or the invoice was not received!
A lot of the delay in receiving payment can be avoided by putting a proper process in place that starts with finding out from the customer exactly how its payments are made – for example does it pay by cheque or via online? are payments run on a specific day, once a month? or is payment only made to those suppliers who shout loudest?
It is important to know before carrying out any order precisely who authorises the order both for completion and payment approval. Often the payment of an invoice involves separate departments within the customer’s company.
Paperwork is crucial with having a procedure in place whereby the delivered/ completed order is signed for/ off with a clause on the document that includes written confirmation that the customer’s requirement have been satisfactorily fulfilled.
This will preclude the potential for a late payer to raise a problem with an order’s fulfilment when it is too late to be able to check or verify. Plainly it is important to be able to easily track the payment progress once the order has been completed and signed off, triggering the rendering of the invoice so good record keeping and numbering systems for identification are a must.
If, when the specified payment date has come and gone, the invoice remains unpaid, matching the paperwork should be straightforward and the final step in a robust invoicing system is to have a procedure for managing non paying customers through putting a stop on processing any further orders and having an approved debt collection procedure that includes litigation should this be necessary.
Too many companies fail to put proper credit management systems in place and end up having to pursue debts through litigation that could have been avoided, or worse end up not being paid which in turn can jeopardise the financial health of their own businesses.