This blog post was written by Richard Haywood, from our partners at Draycir. In this post, he explains how companies can take control of their credit management to improve cash flow and reduce bad debt.
In today’s economic climate, the success of a company is not simply determined through turnover or sales levels. Many large retailers have fallen into administration due to declining sales and changing consumer buying behaviours. We need to consider the necessary steps to take when trading with new or existing customers and suppliers, and how their credit worthiness can be effectively monitored throughout the business relationship.
Provision of Credit Risk information
Many businesses have invested in checking the worthiness of a prospective business via a third party credit checking service or through Credit Risk software. This is a good first step in the credit control process as it helps to determine the amount of credit and payment terms that should be offered to a client. The key question here is: What happens 6 to 12 months down the line? Pay performance is the key to obtaining deeper knowledge about your clients by monitoring their payment patterns with other suppliers. Reviewing clients on a regular basis and adjusting credit terms accordingly will help to reduce your company’s exposure to bad debt.
Setting realistic goals/KPI’s
• Reduction of debtor days,
• overdue debt,
• queries/disputes
Formulating a chase policy
To create a chase policy, it is important to segment customers according to historical payment performance and the amount of trade they provide. Depending on the size of the credit control or collections team, you must consider your available resources. Do you have enough resources to run multiple chase policies when clients fail to pay on time and a more tentative policy to chase customers that provide 80% of turnover and pay within agreed terms? For bad payers, why not introduce some form of pre-emptive chasing? What communication methods and combinations do your clients respond best to? This will determine the frequency and priority of how you chase your accounts. All businesses foster different client relationships, so it is down to the individual business to decide how far in advance to start the pre-emptive chase and how frequent chases are done.
Prioritising the chase
Is your aged debt report up to date? Has all of today’s cash been allocated? The vast majority of a credit controller’s time is spent doing administrative tasks; this can often consist of going through lists of hundreds or thousands of clients and determining which clients to chase first. For those invoices now marked as a priority, you also need to consider any existing notes, promises, disputes, or queries outstanding.
Dealing with disputes/queries and pre-emptive chasing
Dealing with disputes and queries can be complex for companies with many disputes/queries, or where the credit controller needs to liaise with other departmental areas. Crucial to this is having a Service Level Agreement (SLA) in place for the different types of disputes/queries. Logging these disputes with the SLA and assigning it to a key stakeholder can help to improve the workload of the credit controller and reduce the average days to resolve a dispute. By pre-emptively chasing you can essentially record and respond to issues in advance. Depending on the average time in dealing with disputes, this can have a dramatic effect on the company’s debtor days.
Reporting
The key to any report is the quality of information. As pointed out above, this can often be a problem if notes are recorded in disparate systems. Ideally, everything should be stored centrally where a Transaction dossier report will show exactly what has happened within a customer’s account.
To provide a more accurate idea of expected cash flow, a promise cash report should detail the amount promised, a note of who made it, when you can expect to receive the payment, and by which method.
Whether you are facing problems with bad debt or looking at ways to improve your procedures, having the information to make informed business decisions has to be a priority. The information can then be used to question what internal or external issues must be addressed.
Ready to take control of your credit and reduce bad debt, learn more about Credit Hound.
