How to build a simple and effective credit control policy

As any business owner knows, the availability and reliability of cash flow impacts the future success of trading in both the short and long term. With this in mind, mastering a good credit control practice within your business would ensure the consequences or late payment are evaded where possible.

Amongst the many different credit management strategies that businesses are using and considering implementing, a written credit policy should be the backbone, providing continuity and best practice throughout all financial business aspects.

As an agency experienced in credit control, taking care of many clients’ sales ledgers and ensuring their customers pay within terms, we would like to share with you our best practice procedures for a great credit control policy.

Firstly, what is a credit policy?

A credit policy is essentially a set of rules that dictate the procedures that staff should follow when trading on credit terms. It ensures a co-ordinated approach to credit control across the company and will be based on past experiences and best practice, so that it’s as relevant to your business as possible.

In truth, credit policies will vary considerably from business to business. Ranging from a few small paragraphs to several pages that are aimed at either the credit control department or the whole business, both formats can be argued both for and against. The important thing is to get it right for your business.

What are the key benefits?

Biggest of all is that a credit policy will ensure a consistent approach to credit management from every staff member and across each customer. It means that every customer will be offered the most appropriate credit terms and contacted at the right times, whilst ensuring that the credit control team understands what action to take at different stages of the order-to-collections process.

This helps to increase efficiency within the department as staff can get on with their jobs rather than seeking the opinions and approval of other team members and managers. It also removes bias, brings continuity when new staff are recruited and forms a key part of the training collateral.

Whereas some company policies can be regarded as rigid, inflexible structures, however, credit policies can be much more fluid and evolve continuously according to new experiences, trends and industry developments. The end result will be that customers will pay faster and your business’s cash flow will be improved.

To combat late payment, too often we are seeing businesses only react when it’s too late. By taking the necessary steps up front, a more proactive approach can put your business back in control.

How to write a simple, yet effective credit control policy

Roles and responsibilities

A brief description of the delegation of responsibilities for the department / role, including authorisation and decision makers. Ensuring nothing is left to assumption is good practice here.

Communication and procedures 

The backbone of your credit procedure should be the basic do’s and don’ts of your policy. Although it goes without saying, writing this down as an official policy will minimise error from staff conducting and nurturing credit arrangements. It should outline the different avenues of communication between the business and customers that to be used and at which points during the credit cycle.

Choose a reliable credit information partner

Finding an accurate provider that will be able to offer the insight and intelligence you need to make smarter credit decisions will benefit your process by speeding it up and enabling you to make confident choices, based on fact. Consider where to buy credit reports on new and existing customers and ensure you are benefiting from the best deal from that provider.

Existing customers

Re-evaluating the credit histories of existing customers frequently will ensure you keep on top of any potential problems, as their own financial position could change at any point.

Bear the business’s goals in mind

Based on company cash flow requirements, these will fluctuate according to the general economic situation and financial requirements of the business. Decisions made by the credit control function, such as the length of credit terms offered to customers, should be based on the overall business’s cash flow requirements.

Terms and Conditions

These are vital when protecting your business, as inevitably, things can go wrong. Including your terms and conditions on all sale documents, with a statement requiring a signature, will ensure you are not caught out. 

Invoicing 

Ensuring all invoices follow a template, include all necessary information and are issued within 24 hours will ensure all grounds are covered when it comes to late payment, as excuses will be difficult to come by. 

Collections

Even with all your best efforts in managing and upholding a rigid credit policy, there will be occasions where some customers still will not pay on time. Knowing there is a plan in place for such eventualities will take the stress off staff by allowing them to follow a strict process, which should initially begin before the amount is due as a reminder, eventually escalating into letter, phone calls or perhaps utilising a specialist collection agency to operate on the business’s behalf.

Evaluating

Every great credit control policy would not be complete without regular evaluation, ensuring the desired actions are being upheld and are effective in preventing the burden of late payment to the business. If all efforts are ineffective, considering outsourcing this function could considerably reduce demand from staff and improve overall productivity throughout the business.

We hope this quick guide will help you to build a simple yet effective credit control policy that can navigate the problem of late payment and ensure cash flow does not cause a problem when it comes to business growth.

Are you making it easy for your business to be paid?

There are several reasons that customers may choose not to pay on time. But one of the ways your business can make it easier for your customers to pay is to make your credit control more efficient by addressing the payment methods you offer. After all, the easier it is for your customers to pay, the fewer excuses they’ll have not to.

There are a range of payment methods your business can offer, but some will be more suited to a particular sector or customer base. Typically, the more options you offer, the more likely it is you will receive payment on time and in full.

SEPA

The most popular method of payment between businesses has experienced further growth towards the end of 2016. By increasing the speed at which the money enters your account and reducing the administrative burden on your customers, this goes to show that established payment methods still hold the candle to reliability. They are, it seems, firmly in favour with both businesses and consumers.

Direct debit

Some customers may also be suitable for paying via direct debit, which is primarily used for taking regular or recurring payments like household bills, subscriptions, memberships or charitable donations. It can also be used for one-off payments, and is regarded as the safest way of making payments in the UK as the Direct Debit Guarantee protects customers from fraudulent payments. This method increased by 4.9% in 2016 to £1.3 trillion.

Cheques

Interestingly, the digitalisation of finance has failed to dampen the popularity of the traditional cheque, with 51% of B2B payments made via this method in quarter three of 2016 in the UK and two-thirds citing they would experience problems as a result of not being provided with the facility to write cheques.

Although cheques must be posted, take time to clear, are prone to human error and leave you open to common late payment excuses such as ‘the cheque is the post’.

Card payment

In contrast, only 44% of businesses accept payment by debit or credit card, despite the convenience for your customers. If, for instance, you’re having trouble getting a customer to pay up you can offer to take a card payment over the phone, making it harder for the customer to stall with excuses. Additionally, for contracted customers that pay the same amount on a monthly basis, your business may want to consider allowing payment by standing order.

Online

Web-based outlets such as PayPal and bitcoin permit users to transfer converted virtual currency efficiently and securely through the internet, and bitcoin particularly has enjoyed a recent surge in popularity in the B2B sector. Initially popular with micropayments, due to the robust security and low transaction fees, Bitcoin’s B2B venture aims to continue their success using their dedicated BitPay service.

BitPay enables businesses to keep more of their money by avoiding hefty credit card processing fees, offering a static 1% settlement charge. It also offers the flexibility to sell to anyone, anywhere, and does not require sensitive information – eliminating the risk of chargeback and identity theft. However, not all industries and outlets accept bitcoin as of yet.

On the other side of the coin, the widely-recognised PayPal works in a similar method. Initially consumer focused, offering enhanced security and ease of recognised currency payment, PayPal continues to work towards B2B payment demands, integrating with an online invoice issuing company to streamline the process of the invoicing and payments space by reducing reliance on checks and electronic funds transfers.

The most important thing for your business to remember is that, whichever payment methods you choose to accept, your invoices should include all the information your customers may require when making payment. This includes your business sort code and account number, your company address and the name of the account which cheques should be made payable to.

When trading overseas, it is also important to make sure that your IBAN and BIC are included on invoices to allow foreign customers to pay. Also, make sure that if you are billing in currency, you are able to accept currency payments into your account. 

9 credit control tasks you can do in 1 hour or less

Whether you’re a CEO, credit controller or office administrator, we all face the same challenge: there aren’t enough hours in the day to achieve everything we want to.

Business in general is a juggling act. We all have so many responsibilities and tasks that needed to have been actioned yesterday that it’s getting harder and harder to manage our workloads and prioritise the most important bits.

Unfortunately, credit control is one task we literally can’t afford to get wrong in this sense. Certain jobs need to be done at different times, and if they’re not it’s likely to cost the business money. Whether it’s raising an invoice or remembering to call your customer at the right times, it can be difficult to keep on top of everything.

That’s why we’ve come up with nine important credit control tasks you can complete in one hour or less, helping you to realign your priorities to give you back the time we all desperately crave and achieve the best results:

1. Review your sales ledger

This is arguably the most important job for a credit controller. If you don’t know the status of each invoice and customer, it’s almost impossible to take the right action at the right time. Get into the habit of doing this every morning and use it as a tool to plan your day.

Focus on the invoices which have exceeded terms – getting payment from these customers has to be your number one priority as the longer their invoices go unpaid, the more difficult they’ll be to recover.

 

2. Contact customers whose invoices are overdue

Building on the first tip, spend time contacting each of your customers whose invoices are beyond the due date.

Your approach to these calls should vary – the tone should be much firmer when discussing invoices which have been overdue for a long time, for instance.

Ultimately, the exercise should be used as an opportunity to get the latest on why the invoice hasn’t been paid, reaffirm how important their payment is for your business, resolve any disputes that may exist and explain the steps your business will have to take if payment isn’t received soon.

3. Take action on aged balances

Hopefully the last exercise won’t be too big a task and can be completed within an hour – it depends on how many invoices are overdue! – but if it can’t, it’s important to consider what you can do about it.

The longer you spend on unpaid invoices, the less time you’ll have ensuring other customers don’t follow suit. This is where it can be useful to call on the resource of a specialist debt collection agency, as they’ll take on the burden of recovering payment and use their expertise and weight to secure the money you’re owed quickly.

 

4. Contact customers approaching due date

Often as a result of too much time being spent on overdue invoices, it is very easy for credit controllers to neglect customers whose invoices are approaching their due dates. Yet calling a customer a few days before payment is due can be one of the most productive exercises for a credit controller.

As well as bumping your invoice to the front of their mind and ensuring it hasn’t been misplaced, it will often encourage them to pay it within terms as they won’t want the awkward conversation the day after it exceeds terms asking where payment is.

It will also help to identify customers who are genuinely going to struggle to meet your due date and allow the company’s cash flow forecast to be adjusted. After all, no-one likes nasty surprises.

5. Credit check long-term customers

Many businesses will have a large proportion of repeat customers who you’ve been supplying for a number of months or even years. But whilst you probably credit checked them when they made their first order, when was the last time you did so?

Unfortunately, today’s choppy waters means the financial position of businesses can change overnight – often through no fault of their own – which could mean they may struggle to pay your next invoice on time or at all.

Take the time therefore to credit check those long-term customers to get a more up-to-date picture of their business. Credit reference agencies have subscription models to maximise value for their clients, whilst it’s also possible to credit check businesses on an ad hoc basis.

 

6. Review your invoice

When was the last time you reviewed your invoice? Do you offer the most appropriate payment methods for your market, and how clearly are these stated on the invoice? Design is important in a wide range of business aspects, but it can also make a huge difference to encourage prompt payment.

For instance, are your credit terms clearly stated? Can the customer see exactly what they’re being invoiced for? Could you make things even clearer? Take the time to compare your own invoice against others you receive to see if you could try something new.

 

7. Brush up on your company’s credit policy

If your company does have one, ask yourself how well you know it? If the answer is ‘not very well’, how can you be following it?

Take the time to read back through it and make sure you’re following its steps. Credit policies are there to help you and, when done right, should be based on best practice to improve performance.

It’s also worth making a list of recommendations of ways you think it can be improved based on your day-to-day experiences. It should be an evolving document, after all.

8. Book yourself onto a training course

It’s extremely easy for us all to get set in our ways and tell ourselves that the way we do things is the right way. But when did you last receive some proper credit control training?

Whether it’s a seminar held externally or you get someone in to talk to the whole department, training can be an excellent way of identifying new methods to improve results and put to bed any bad habits you might have gotten into.

Have a quick Google, there are plenty around that could be extremely beneficial!

9. Find online resources

If that’s not possible, perhaps due to budget constraints, there are plenty of useful online resources which are free to download to help you improve your credit control.

Whether it’s a blog post such as this (which we hope you have found useful!) or more comprehensive resources, there’s so much information available to credit controllers. Not all of it will be relevant to you as every business is different, but even if you glean one new tip it could make all the difference to improving your performance and helping your company get paid on time.

 

How to avoid an invoice dispute

Anyone that has ever experienced a payment dispute will know that, most often, it starts with the invoice issued to the customer.

As a business, having a payment delayed and disputed will not only take up your credit controller’s time, but it will directly restrict your cash flow. If this dispute is joined by others, the problem multiplies and causes unnecessary headache, leading to unexpected cash flow gaps that could put your business in danger.

To ensure this doesn’t happen, here are 6 handy tips to avoid conflict by taking some simple proactive and preventative steps. The great thing is this will take a fraction of the time needed to chase late payment and resolve disputes.

1. Examine your invoice template

Here, you’re looking for simplicity. Are all the elements clear? Is the invoice addressed to the right person, decimal point in the right place (sounds silly, but it happens!) and the terms clearly stated? Does it clearly explain the products and services provided – and can they be broken down for extra clarity? Having these prominent and clearly instructive among other elements will yield a better chance of timely payment. 

2. Double check

Everyone makes mistakes. It’s easy to do, but it’s also easy to correct provided you double check your invoices before they are sent to your customers. An extra couple of minutes’ fact-checking figures and addresses will avoid a delay in payment of days and sometimes weeks.

3. Stick to your original quoted amount

If your customer receives an invoice with additional costs added from the previous quoted amount, they may understandably wish to query this, which will delay payment to the business. These sorts of surprises usually aren’t well received, so make sure any increases to the quoted price have been explained and agreed before the invoice is sent.

4. Make a courtesy call

Not sure where to send the invoice or who to address it to? Calling your customer to ask this information will not only benefit you, but it will also serve as a gentle reminder that the invoice is on its way. Always be sure to call again after the invoice has been sent to check whether the invoice has been received – and crucially that everything’s in order. This call can act as a gentle reminder also, leaving your invoice at the forefront of the customer’s mind. 

5. Set a time limit on disputes in your terms and conditions

To ensure any disputes are raised nice and early, state in your terms and conditions that disputes can only be raised within, for instance, the first week after receiving the invoice. This will give you plenty of time to rectify any errors or settle the dispute well in advance of the invoice’s due date, also protecting you from customers who use disputes as a stalling tactic.

6. Stick to a good credit control procedure

If you haven’t yet got one of these, a credit control policy will ensure all situations are handled in a similar manner and dealt with effectively to ensure payments do not become or remain overdue. Keeping in regular contact with the customer throughout the credit period is important, giving them ample opportunity to make any queries regarding the invoice. 

Help! My invoice is still disputed…

If you find that, despite taking all of these steps, your invoice is still being disputed, investigate why the dispute exists immediately. Once you have a firm grasp of this, consider the reasoning behind the dispute before deciding which route of action to take.

  • If there’s an error on the invoice, be sure to re-issue a new, up-to-date version and send it to you customer straight away.
  • If only part of the invoice is being disputed, make sure the remaining undisputed part is paid whilst you work toward a solution. This will also help to identify those who have raised a dispute to give themselves more time to pay.
  • If the invoice is being disputed unfairly as an excuse for late or non-payment after terms have been exceeded, consider enlisting the help of an experienced debt collection agency. Sometimes, the added weight of a third party on your side will be enough for the outstanding balance to be paid. This will free up your time and help move things toward a solution.

It is important to recognise that disputes are extremely common nowadays and consuming an even greater amount of credit control resource. The important thing is to establish as quickly as possible whether it’s a genuine dispute, a stalling tactic or an error on your part.

If the job of credit controller ever becomes too big for an in-house department, there are experienced external agencies who can handle your business’s credit control function efficiently, so you don’t have to worry. 

Does my business need a credit control department?

Many businesses will reach a point in their evolution when they decide to specialise different aspects in order to bring expertise into the company and reduce the burden on the owner and other staff members.

Whether it’s sales, marketing, IT or recruitment, there are a number of jobs that can benefit massively from having specialist resource and knowledge.

Credit control is no different. With late payment causing so much concern for businesses, a huge proportion of those without a dedicated credit control department will have been considering whether they need to introduce one – and those with one already in place will have thought about the merits of increasing its size.

Unfortunately, there’s no magic number in terms of turnover or headcount that determines whether a business should have a credit control department. So how do you know when that time comes?

Here are five things to consider to help you make your decision.

1. How promptly is my business being paid?

On the surface this looks like to the most important consideration. If you find that your existing processes aren’t working and customers are regularly paying beyond agreed terms – or not at all – and you’re often using debt collection agencies or the courts to recover what you’re owed, this is simply unsustainable.

Every business relies on a healthy cash flow to operate and even exist, so it’s important that you are getting paid on time.

2. How much time am I spending on credit control?

Even if your business is being paid promptly by customers, there are other factors to consider. For instance, how much time are you having to spend on credit control?

There are only so many hours in a day, and any time you spend chasing customers for payment or doing basic credit control admin jobs is time that’s not being spent seeking new customers, networking or identifying new growth opportunities. Often, the single biggest factor behind a business introducing a credit control department is to free up more time to grow the business.

3. Do I know what I’m doing?

We’ll let you in on a little secret: not every business owner knows everything there is about running a business. And it’s ok! That’s why bigger businesses have large management structures and departments in place, so owners can surround themselves with knowledge and expertise.

Credit control isn’t easy. There’s a lot to do and consider – not to mention best practice – while there’s also plenty of legislation to take into account. How well do you know the legal system, for example, which is so complex but can be so beneficial when a customer doesn’t pay?

If you find that you’re sort of making it up as you go along, it might be time to hire a specialist.

4. How many of the basics are you doing?

We mentioned best practice in our previous consideration, and it’s certainly an important point. When it comes to credit control there is a never-ending list of tricks and tips you could implement in order to improve results. 

For instance, are you calling customers to check receipt and the accuracy of invoices, which can play a huge role in reducing disputes?  Are you putting in a courtesy call a few days before the invoice is due? And how quickly are you acting when an invoice exceeds terms?

These are all important stages of the credit control process, but they take time and expertise to get right. 

5. Do I know what my sales ledger looks like?

Everyone who’s responsible for their credit control should keep a keen eye on the business’s sales ledger. It’s important to always be aware of which invoices need prioritising to minimise late payment, but maintaining it can be a dull and time-consuming job.

If you aren’t regularly reviewing it or are spending too much time on it, maybe it’s time to consider hiring someone that can.

Save your business from the jaws of late payment – 8 top tips

With so many businesses relying on timely payments to avoid cash flow shortage, and one in 10 of those surveyed fearing insolvency as a result of this, we confront the causes and reveal these 8 simple solutions to help encourage your customers to pay on time:

1. Create a clear credit control procedure

By clearly setting out a day-by-day strategy from the moment an order is placed until the invoice is paid, your accounts receivables team can adopt a co-ordinated and professional credit control procedure.

2. Know your customer and compile a stop list

It is important to know your customer’s payment history before committing to offering credit terms. It can often help to place persistently late paying customers on a ‘stop list’ and warn them that they will not be supplied with any further goods or services until all outstanding invoices have been settled.

3. Invoice quickly and accurately

It sounds obvious, but it’s imperative to invoice quickly as some customers won’t pay until they receive the invoice which, along with any inaccurate information or unclear terms and conditions, can cause delays in payment. Acting quickly can also help you build a friendly and positive relationship, which ultimately encourages customers to pay on time.

4. Make it easy to get paid and encourage early payment

Giving your customers simple payment methods to use, such as BACS payment, direct debits and standing orders, and clearly displaying this information on invoices is an effective way of ensuring you get paid on time, as well as incentivising prompt payments with early settlement discounts.

5. Chase as soon as credit terms are exceeded… and don’t be afraid to take action

After reviewing your sales ledger regularly, you will be able to instantly spot any invoices that have exceeded credit terms and be more likely to get the desired outcome. Whilst remaining professional and polite, don’t be afraid to take action to get the invoice paid. The money owed is rightfully yours and can ultimately affect your business.

6. Be sceptical, and charge interest

Don’t always take your customers’ excuses for not paying for face value. Sadly, more often than not the excuses they will use are delaying tactics. By charging interest, you will encourage faster payment but also, by suggesting they pay by BACS transfer or direct debit, it will element the age old excuse of “the cheque is in the post”. 

7. Bring in the experts and outsource or hire a credit controller

Credit control ought to be an everyday business task, given its importance to the success of your business. However, juggling this with every other task associated with running a business can be time-consuming, so bringing in an outsourced credit controller can help give you the time to focus on other areas. .

8. Thank customers who pay on time

Not everyone bends the rules, so thank those who pay you on time. It not only shows that you are grateful, but good customer service can ultimately lead to subsequent sales.