Cash is the lifeblood of any business. And in the first few years of your start-up, the ability to get cash into your bank account faster than it goes out again will be one of the main measures of whether it is a viable business.
Every year, many small businesses fail, simply because they run out of cash. Even profitable businesses can be brought down by cash flow problems caused by slow-paying customers.
Without clear credit control procedures to ensure your customers pay you promptly, your business won’t be able to grow and could jeopardise your ability to pay your own bills in a timely manner. That’s the start of a slippery slope that can end in the destruction of years of hard work.
Don’t let your business die this way. Here’s how to build good credit control procedures into your operations from day one, with ByteStart’s seven ways to make sure your customers pay you on time, every time.
1. Clearly set your expectations
The first step for your new business is to work out how quickly you would like to be paid, balanced against the realities of the markets you operate in. It would be lovely to see the cash within 7 days of delivering the product.
Unfortunately, that’s an unrealistic goal if you supply companies that automatically expect 90 days’ credit without asking.
Your standard credit terms should also be set by how quickly you have to pay for raw materials to provide your product or service. If the goal is to get the money in your bank before it goes out again and your suppliers expect payment in 30 days, then perhaps you should set terms of 14 days.
You shouldn’t worry about letting your customers know what your payment terms are. You should clearly print your terms of business on all your paperwork, such as invoices, contracts and Terms & Conditions (T&C’s).
2. Make it easy to be paid
These days, you will be shooting yourself in the foot if you state that you only accept payment via cheque! There are so many better ways to get money out of your customers – and most are faster too.
You should make it as easy as possible for customers to pay you, and should clearly provide your online banking details and address for postal payments on all invoices.
Help customers set up standing orders if they pay you the same amount regularly, or consider using a company to collect Direct Debits for irregular amounts. Be aware it can be expensive to collect Direct Debits, and your business won’t be allowed to do it unless it passes a stringent set of rules.
Many businesses now use services such as PayPal to accept online payments.
3. Credit check new customers
Giving a client 30 days to pay should be a conscious decision based on facts, not an automatic right. After all, you wouldn’t give credit to a new client that was about to go out of business or owed thousands to others. The only way to know for sure is to do a credit check.
Yes, it will cost you a few pounds to do a credit check but it could save you thousands in the long-term.
There are a couple of suggested rules to help reduce this cost and target only the potential high-risk clients. First off, set a credit ceiling; for example, you don’t credit check anyone with an order under £500 or £1,000. Your business and average order size will set this limit.
Next make a priority list of clients to check according to the size of their debt, or potential debt (i.e. if they will be ordering from you every month for the next year).
You can get a good credit check, which will confirm full customer details, financial results, how good they are at paying other suppliers, any county court judgments, and a recommended credit rating, from a variety of sources online.
Credit checking won’t guarantee payment. But it gives you valuable information about the creditworthiness of your potential customer, allowing you to make a better decision about the order.
You can ask customers that aren’t good for the credit to pay in advance.
4. Encourage prompt payment
Rather than opting for the ‘strict’ approach, you could reward customers for early payments by providing a small discount if they pay within a certain time period, such as seven days.
Your cash flow will benefit, and you can always incorporate the ‘discount’ into your pricing so that you don’t lose out.
If you are going to offer a prompt payment discount don’t assume your clients will know that you do this. You need to put it in front of them regularly to get them to react to it.
To encourage uptake, you should clearly show the early payment price on the invoice and get some postcards or flyers printed that you can enclose with every invoice.
5. Have a clear procedure for credit control
Set a clear procedure for credit control with standard reminder letters to send out when payment hasn’t been received on time.
Send the first of these reminder letters out the day the invoice becomes overdue, and subsequent letters every 7 days. The letters should be polite but insistent and remind your customer that you have the legal right to charge interest on the debt from the day it was due. You can send some of these reminders by email.
If you use an online accounting package to generate and send your invoices, there should be a facility for you to set up automatic email reminders for overdue payments. This can save valuable time.
You will no doubt hear many excuses for why you haven’t been paid. ByteStart’s guide to 10 late payment excuses used by customers – and how to deal with them will help you tackle these!
You should also find a reliable and reputable debt collection agency, and use their name in letters to show you mean business.
When a debt has reached the end of your process hand it over to a debt collection agency. Most agencies say the earlier they get the debt the more likely they are to recover it – getting a call from an agency wakes up most solvent businesses.
6. Don’t be afraid to take action
The last course of action you should take if you are faced with a late-paying customer is to ignore the problem and hope it will go away.
Customers often forget to pay on time, or there are genuine reasons why payment has not been forthcoming. Of course, deliberate late payment is also commonplace.
You cannot afford to let another business affect the health of your own business, so don’t be afraid of taking further action for persistent offenders.
7. Treat credit control as an important job every week
Put 30 minutes a week to one side to deal with credit control, and don’t let anything get in the way!
The best way to keep on top of late payment issues is to be able to work out exactly what your cash flow position is at any moment in time – how much is outstanding, and how many invoices are late.
Many online accounting packages, including the excellent Freeagent, allow you to view all your overdue invoices in a few seconds, so checking up needn’t take long.
Last updated - 14th October, 2017