Posted by Dawn Aldwinckle on September 22nd, 2011
The finance function is ultimately responsible for ensuring the financial health of the business. In the current economic climate, with restricted lending from high street banks, limited economic growth and cost pressures reducing operating profits, controlling the working capital of a business is becoming more critical.
Customers who pay slowly often do so as a means to support their own working capital and it is always a difficult subject to chase for payment. However, it is important to remember your terms of business and that you have only incurred costs and used the working capital of the company until you receive payment from your customer.
George McDonough, FD, Lakeview Computers Ltd
To reduce the chances of a customer compromising your cash flow it is important to ensure your credit control processes are streamlined and automated where possible. This can be achieved by:
1. Using Technology. Sending invoices by email will help reduce the time it takes for invoices to be processed and will provide a trail. Invoices cannot ‘get lost in the post’ and you will know if an email has not been delivered! Additionally, encouraging customers to pay by BACS will prevent cheques from being lost and taking additional time to clear the banking system.
2. Ensuring Customers have received your invoice. Your credit control processes should be sufficient to check customers have a copy of the invoice and that the invoice has been processed for payment. It is better to be aware of any queries a customer has with approving the invoice before it is overdue.
3. Understanding your Customer: Regular credit checks should be performed to ensure your customer is able to pay for the goods you are supplying. This should be factored into your credit control processes and the credit terms you are willing to provide. You should ensure you are aware of the customers who consistently exceed their credit terms, dispute invoices and generally pay late.
4. Enforcing your terms of business: Your customers have probably signed up to your terms of business and you should ensure these are enforced. A customer may have a reason for payment to be late, but consistent late payment will require action. Ensure you have a good dialogue with customers and that they are aware their account will be placed “on stop”, the consequences of this and also how they can make payment.
5. Communicating internally: All your employees should have an understanding of the credit control procedures. Existing customers should have credit limits and credit terms that are adhered to, and sales should only be accepted where the customer has the ability to pay. Before you receive payment from your customer, the sale has cost you time and money and has used up your resources which could be better spent elsewhere. Accounts which have been placed on ‘stop’ should be communicated within your organisation.
This is the first of two blog posts by George McDonough focused on making debt collection a company wide concern. The next in this series is due for publication next week.
Author: George McDonough, Finance Director of Lakeview Computers Ltd