Cash flow is described as the life-blood of your business. It certainly is just that and, if you wish to be successful, this means you need to ensure all sales you make are paid for in line with your credit terms. Many businesses offer credit terms without realising the impact that giving time to pay an invoice can have on the cash flow. What are credit terms? Credit terms are an understanding between you and your customer as to the payment period which you apply to an invoice. It is offering them a short term loan and your customer’s adherence to your terms can have a significant impact on your cash flow.
Good credit control or credit management is not all about demanding invoices and getting paid, it is the whole process which starts at protecting your company at the beginning and ends with reinforcing great customer relationships.
There are simple ways to minimise your risk and protect your business and a credit account opening process is really important. Many businesses miss out the first steps below thinking it will all be OK but it will only be a matter of time before you suffer a bad debt if you miss out the ground rules. One bad debt can bring down a small business altogether. The sooner your customer pays you, the more access you have to your cash to put back into your business and keep things running.
Don’t be afraid to put into action the following points to protect your hard work otherwise you could be providing your goods or services for free without knowing it yet.
Accounts system: You must have a system to raise and record invoices and post transactions. Good accounting software is essential, however small or large you are. A successful business that gives customers credit terms will need a place to record and monitor this information to safeguard your sales and cash flow. Speak to your accountant or you can now find some good cloud accounting options which start at around £19 per month to include support and some element of automation to ease the admin burden.
Know your customer: When you take on a new customer, get them to complete a new credit account form showing the full name of the person or business and their full details. For example, are they Limited, partnership, sole trader? All businesses that want goods or services now but want to pay for them later should not be put out by you asking for this information. The form should ask them what credit limit they are looking for. It is also good practice to get trade references in business to business transactions. You should also ensure that the person completing and signing the form has the authority within that organisation to do so.
Credit check: On receipt of the account form, credit check your customer and set how much credit (limit in £s) and credit term (time to pay), if any, you are prepared to give them. Credit check information is crucially important to help you find out your client’s trading history and minimise the risk to you. You can then gauge whether your new client or its owner will pay you on time or at all.
Getting the credit terms right for your business is a must. Just because you have always allowed your customers to pay you at 45 days doesn’t mean it is the right thing for your cash flow, particularly if your suppliers expect you to pay in 14 days. It is the norm these days to give no more than 30 days so don’t let customers badger you into extending these terms if it will mean your business will suffer. A request for extended terms could mean a sign of financial instability.
Terms and Conditions: You should send your Terms and Conditions of Sale to your customer and make it clear what you have agreed their credit terms to be. Your T&Cs should also include a clause stating that any queries with an invoice must be submitted in writing within a certain time limit e.g. 7 days. This will prevent an extension of credit terms by your customer for queries.
Most businesses do not like to charge late payment interest or additional costs for fear of damaging the customer relationship, however, it can act as a deterrent if you put them in your terms and conditions. Most businesses will expect to see wording relating to late payment charges of invoices and it also shows you are serious about being paid on time.
Clear and Prompt Invoicing: Your payment terms should be clearly shown on your invoice and you should raise and send the invoice promptly once goods or services have been provided, preferably same day as then your credit terms will start immediately. If you leave all your invoicing until the end of the month and you have also given 30 days credit, then your customer pays you late, you could be into 60 days minimum before your cash comes back.
Chase your invoices: Sounds simple but most business owners and employees do not like this part of the job and try everything to avoid it, email it, automate it or just hope invoices will be paid without reminder. Some will pay without chasing, most won’t pay until reminded, especially as your business and your customer base grows. The only way to know why your invoice is not paid is to ask your customer. If you don’t want or don’t like this part of the job then you need to employ a person or service with credit control experience.
48% of customers delay payment and the average days sales outstanding across all industries is 61 days. Can you afford to wait that long?