‘Cash is king’ is one of those phrases in business that everyone perhaps knows, but not everyone applies to their day to day business.

If your cash is safely in your bank account, then you have the choices for your business rather than being the lender to your customer who has taken the liberty of extended credit.

We recently met a prospective client who, due to a possible bad debt, had much more to lose than just the cash. His turnover was £780,000 with a net profit of £30,000. His own income was made up from dividends each year based on the annual profits of the business. He had a low volume of customers, but with an average value of £25,000. However, without implementing credit limits, due to the desire to sell more, he had allowed one of his clients to build up a balance owed as £44,000. He claims his advisors had not highlighted the aged debt to him. So, when he noticed the level, he made the effort to collect the debt, only to find the customer could not pay, had exhausted credit lines and was simply avoiding him as it was likely they would have to go into liquidation. So the deeper impact was on the viability of the business, the risk to the staff he employs, but also the ability for him to draw his own income from the business as both profits and expected cashflow were at risk. Worrying times.

It is also worth noting how much new business you have to attract to replace a bad debt. For example, you will see from the table below, that if you have a bad debt of £5,000 and your margin is 10%, then you will need an additional turnover of £50,000 to replace that profit.

So how can we gain better control of our debtors?

Here are some credit control tips:

  • Measure, understand and manage your ‘debtor days’ and the impact
  • Understand the value of lost cash to your bank account that someone else is using, usually for free. eg Debtors days as a value in cash.
  • Send statements to your customers at least monthly and do not be afraid to write / call to ask
  • Issue a reminder a week before the invoice is actually due for payment
  • Check in advance that the invoice has been received, they are happy to pay the invoice and, if it needs authorisation, that this has been completed. Remove possible future excuses.
  • Produce accurate information and paperwork, as an easy delay tactic is to state a missing invoice or credit note.
  • Have good terms and conditions that give you control, especially to retain ownership of product
  • Have an audit trail of delivery. Delivery notes signed for products or something like a timesheet for service businesses
  • Have an application form for credit and start new customers or start ups with ‘cash on delivery’ or short managed terms until the relationship is established and known
  • If considering legal action, then ensure you can evidence that the customer understood the offer / product, understood the pricing & terms, and has received delivery
  • Undertake vetting of your new credit customers
  • Use credit limits and be aware of customers taking extended terms to fund their lack of working capital
  • Share experiences with other credit controllers
  • Know the common excuses or reasons provided for non-payment and have a planned response to each comment
  • Stay in control when collecting your money. Make a record of conversations, refer to them and know the common excuses
Sage Accountant Partner Logoiris kashflowFreeagent