10 early warning signals for credit management survival

With over 10,000 businesses failing because of late payment each year, the Better Payment Practice Group [BPPG] advises businesses to be alert to the signs of a failing credit management policy.

The BPPG has identified the following top 10 early warning signals that a business’ credit management policy is in need of improvement:

1. Hitting the overdraft limit - If your business regularly reaches or breaches the limit of your bank’s credit facilities, review your asset management policies in general and credit management in particular.

2. Extended aged-debtor lists - If your debtors are persistently paying invoices outside the agreed credit period, assess your collection methods and identify areas for improvement.

3. Good payers slowing up - If customers who usually pay promptly start to slow up their payments they may have recognised your collection system is slack.

4. Quality complaints - Customers may start to take advantage of an inefficient system by using spurious complaints and queries to extend the credit period available and improve their own cash flow at your expense.

5. Administrative excuses - Excuses such as ‘computer failure’ may also be a sign that the customer has recognised your credit system is lax and capable of exploitation.

6. Customer insolvencies - Credit insurance or a strong internal system of credit risk assessment can protect your company, particularly if it is too heavily reliant on the business of one particular customer, or has a range of customers who are vulnerable in cash flow terms.

7. Supplier stops - If your business is not paying its own bills there will inevitably be a point when you exceed your credit limit and supplies are halted.

8. Credit ratings and market rumours - Both will damage your prospect of attracting new business and will potentially further constrict cash flow.

9. Arrears of PAYE, NIC and VAT - Do not be tempted to seek credit from the state by not paying your tax. Government departments have the power to immediately seize assets, without prior warning.

10. Low staff morale – Staff are sensitive if your business shows signs of distress such as having difficulties with cash flow. You risk losing your best employees, making the situation worse.

Clive Lewis, Head of the SME Unit at the ICAEW and member of the BPPG commented, “Cash flow is the life blood of every business and should be protected as a priority. A good credit management policy will include a strategy for credit checking customers, a well-planned collection process and a system for dealing with queried invoices. Not every credit management policy will be fool proof but it is important that businesses identify and respond quickly to the signs that it is failing.”