Developing a good credit management policy

Most companies blame unpaid debt on customers who are reluctant to pay. The reality is it is often their own credit management systems that are at fault...

Credit management starts with the sale and goes right through to full and final payment.

It is as important as closing the sale and it's about minimising the time and effort spent on chasing up unpaid invoices and ensuring the resources you do expend on credit management are efficiently used.

So how should you approach your credit management?

Credit check your customers

Don't sell blind. Before you issue credit to new customers you should first evaluate their ability to pay.

There are several ways of credit-checking customers. Bank and trade references can be useful, or you could buy a status report from a credit agency. This will give you full details of financial results, payment history, any county court judgements and other valuable information.

Re-evaluating existing customers' credit histories, from time to time, is advisable too. Circumstances change so don't assume a business with a good credit rating will retain that status indefinitely, for example, if they are starting to pay later and later, it could mean they are in financial trouble.

If your checks reveal a less than perfect credit history, it doesn't automatically mean you shouldn't do business with that customer. It does, however, allow you to make an informed decision about the proposed deal. You may, for example, ask them to pay part of the bill up front; give them shorter payment terms; or chase the payment earlier and harder.

If credit checking all your customers is too time-consuming or expensive, you can introduce universal credit limits and only do full checks on customers that want to place larger orders. This is particularly useful for new customers when you don't know if it will be a one-off sale or the start of a longer relationship worth investing time and money in.

Establish your terms of trade

Your 'terms of trade', also called conditions of sale or terms and conditions, protect your rights as a seller. They cover your liabilities and payment terms and can include a retention of title clause - this gives you full ownership of the goods until the customer pays for them in full.

Your terms of trade is a legal document and needs to be drawn up by someone with legal expertise. Alternatively, you can buy standard conditions of sale that can then be adapted to your particular needs.

Your customers will also have their own terms of trade - equally detailed and equally legal. This covers their own rights to reject the goods or services if they are not of acceptable standard and so on, and may include their own payment terms.

If this situation arises, it should be clearly established at the point of sale whose terms of trade take precedence.

Many companies print terms of trade on the back of invoices, but it is better to quote them on the back of the initial order form or quotation so that they are examined at the start of the transaction. Print a box on the front of the document asking the customer to sign it, stating that he or she agrees to the terms and conditions of sale.

Make sure you have full customer details

Make sure you know exactly who the customer is - it's amazing how many companies don't. If there is a problem with payment, it will help you considerably if you have full customer details. This includes a contact address, phone and fax numbers, email address, VAT number, registration number (if a limited company).

You should also find out when that company usually pays their bills - do they usually do their cheque runs at the end of the month, for example - this will help you establish a realistic payment due date.

Invoice promptly and accurately

Invoices should be issued within 24 hours of goods delivery or service provision. They should contain all the necessary information and should be accurate. This avoids delays in payment while details are checked. Invoices should contain the following information:

• Name and address of the company making the sale
• Name and full phone number of person to address queries to
• Terms and conditions of sale
• Invoice number (these should be consecutive)
• Order number
• Description of order
• Delivery date
• Unit price
• VAT number, amount and rate (if registered for VAT)
• Total amount due
• Payment due date
• Payment terms
• Discounts given (if any).
  
  

Tracking unpaid invoices

One you've done all this, it is sadly not just a case of sitting back and waiting for the cheques to roll in.

Carefully monitoring invoices as they age and, for example, phoning a supplier to check they are on track to pay just before the due date, boosts your chances of receiving prompt payment.

To do this efficiently you need to produce an accounts receivable ageing report which tracks invoices until they are paid. Computerised bookkeeping software can do this for you or you can create a manual version yourself.

You can then track each invoice, keep an eye on what is due when, and phone major accounts before the due date to check there will be no problems with payment.

It also makes it easier to see when invoices are overdue - and by how long - thus triggering your debt recovery process.

You should check your accounts receivable ageing report once a week, and make sure it's up-to-date by noting down when payments were actually received. This will give you a historical record for when you re-visit individual customer's payment histories or analyse the efficiency of your credit management policy.

Collecting the cash

Most customers will pay up, in full and on time, but unfortunately some won't. This could be a simple oversight, an administrative delay or perhaps they're waiting for payment themselves. Whatever the cause, the more actively you pursue the debt - without getting aggressive - the more chance you have of actually getting paid.

Once an unpaid invoice is so many days overdue - a week is usual - a debt recovery cycle should swing into action. This will normally include phone calls, letters and faxes before it is referred to a solicitor or debt collection agency. This latter stage will cost you money and compromise goodwill so you should only use it as a last resort and if you are going to follow it through. Alternatively, you could decide to make use of the Late Payment Act.

There is no such thing as a definitive credit management policy. You need to develop one which meets the needs of your business and your industry sector. Even when you have a policy there may always be exceptions you want to make for favoured or important customers - but do remember that the larger the customer, the bigger the impact the non-payment of credit will be, so be careful.

The final stage in the process is to tell employees what the policy is. Enforcing the credit limits and checks on over-enthusiastic sales staff can be a particular challenge. If you have a sales team you need to make it clear that their role is not just to sell, but to sell to clients who can and will pay.

This doesn't mean you should hold them accountable for every bad debt, but it does mean that you can insist they follow a set process and consult you (or other senior decision maker) if they feel the need to deviate from set policy. A credit management policy will only work if everyone who deals with customers takes it seriously.