We all know that cash flow problems can result in costly overdraft charges and bad debt, or even, in the worst-case scenario, lead to business failure. After all, the biggest cause of small businesses closing down is mismanagement of cash flow. Yet, SMEs are still making mistakes when it comes to implementing and following through credit control procedures.
Do any of these classic mistakes ring true in your organisation?
1. Not having anyone within your company dedicated to credit control matters
Having someone supervising credit control can reduce the risk of having to “write off bad debts”, which can cause business difficulties. If you can’t do it yourself, it’s crucial you assign someone to else take care of it.
2. Not making payment terms crystal clear
Ensure that you reinforce payment terms on your website, invoices and contracts it’s important that all customers are aware of the consequences of late payment. The last thing you want is regular customers making a habit of it.
3. Not sending invoices out in a timely manner
It’s logical, really. If invoices don’t go out on time, payments won’t come in and your cash flow will dry up. For best results, send the invoices as and when your goods or services are delivered.
4. Making basic errors on an invoice
Be aware that unscrupulous companies will use invoice errors as an excuse not to pay up, so ensure you have someone who carries out thorough checks.
5. Not having a system in place to chase outstanding invoices
The longer an invoice is outstanding, the harder it will be for your business to collect the debt and the lazier your customer is likely to be about paying. Try placing outstanding invoices in date order to identify the oldest unpaid ones and follow up with emails, or better still, phone calls.
6. Not carrying out checks on potential new customers
Without adequate credit checks your business is exposed to delayed or even non-payment. There are a number of organisations you can contact to attain a reference your potential customer’s bank, existing suppliers or a credit reference agency.
7. Similarly, not setting credit limits for your customers
Based on information from references and your own credit checks, you need to determine how much you are willing to risk with a new customer. Once you’ve set a limit, stick to it some customers will attempt to persuade you into providing more.
8. Being too aggressive with your credit control
If you demand payment before payment terms have been reached, customers may react by leaving payment to the last minute to teach you a lesson! Yes, it’s rather petty but it does happen.
9. In contrast, being too passive with your credit control
When it comes to payment terms, you also need to be strict. If a customer has overdue debts, do not give them credit whatever the sob story. Remember, it’s your business’s health on the line.
Simon Reynolds is marketing manager at First Capital Cashflow Ltd.