Cash flow problems are the main reason many small businesses go to the wall every year. It doesn’t matter how profitable a company is on paper, if the customers are not paying their invoices, the cash flow will soon dry up, and the business won’t be able to pay its operating expenses. One way to avoid this catastrophe is to have robust credit control procedures in place from the very beginning.
Related: Get paid by your customers on time
New customer credit control
New customers are an unknown quantity. You have no idea whether they will pay their invoices on time, so it pays to be prudent before placing all of your eggs in one basket. Before agreeing to do some work for a new customer, make sure you do the following:
- Run a credit check – It is very easy to run a simple credit check online. There will be a small cost, but if it saves you the pain of a significant bad debt, consider it money well spent.
- Set an upper credit limit – Never agree to give a new customer unlimited credit, no matter how much they try and persuade you they are good for it. Have a reasonable upper limit and stick to it to minimise your risk.
- Get customers to agree to credit terms – Have a standard set of credit terms in place for all new customers that clearly states (amongst other things) when invoices are due for payment and whether there will be any interest charges in the event of late payments. If you are not sure what to include, ask your accountant for advice.
Monitor existing customers
- Don’t extend credit on bad payers – If a customer habitually pays their invoices late, insist that they pay the outstanding amount (preferably in cash) before offering them any more credit.
- Ditch persistent bad payers – Since poor payers are a real liability for a small business, it is sensible to sever relationships with these customers.
Have a credit control system in place
Never let late payments slide more than a week. Keep a close eye on your sales ledger and make sure you are always aware of any outstanding accounts. Call up the customer and find out when payment is likely to be forthcoming—and don’t be fobbed off with excuses such as: ‘the cheque is in the post.’ Be polite at all times, but be prepared to take the matter further if payment does not materialise. Sometimes the threat of further action is enough to persuade a customer to settle their debt, but just in case you are forced to take the matter further, keep a record of all correspondence.
It is easy to forget about credit control when you are caught up in the day to day running of a small business. After all, there are a million and one tasks you need to take care of, so chasing customers up for non-payment of invoices may not be high on your list of ‘things to do’. But it should be—it only takes one or two large outstanding invoices on the books to damage cash flow, so make credit control a priority at all times.