As a business owner, managing cash flow can be a constant challenge, especially when it comes to ensuring your customers pay on time. Having worked in organisations where dedicated credit control staff were needed to chase in £’000s of overdue invoices, and seen small businesses crippled by poor cashflow we have learnt that pro-active credit control is key.

Here, we share our top tips for managing credit control processes to help you ensure timely customer payments and maintain a healthy cash flow.

1. Know Your Customer

Proactivity is the cornerstone of successful credit control. The first step is to thoroughly understand your customers. Beyond just knowing their contact information, take advantage of tools like CreditSafe to run business credit reports. These reports provide valuable insights, such as:

• Turnover and Financial Health: Get an overview of your customer’s financial stability, including their annual turnover and asset values.
• Outstanding Debts and Payment History: Understand their current debt levels and whether they have a history of late or missed payments.
• Credit Scores and Recommendations: Credit agencies often provide a recommended credit limit and payment terms based on the customer’s profile, which can guide your decisions.

Although information on smaller businesses may be limited, having even a basic overview can help you make informed decisions about extending credit.

2. Negotiate Payment Terms and Credit Limits

There are two key factors to negotiate with your customers: payment terms and credit limits. These two factors should be tailored to each customer, balancing their needs with your business’s financial stability.

• Payment Terms: While 30 days end of month is a standard in the UK, it’s worth researching industry norms and discussing with your customers to find terms that are mutually agreeable. Some industries may allow shorter terms, which can significantly improve your cash flow.
• Credit Limits: Establish a credit limit that reflects both the customer’s financial capacity and your risk tolerance. The limits recommended by credit agencies can serve as a starting point, but don’t hesitate to adjust them based on your comfort level and the nature of your relationship with the customer.

3. Solid Terms and Conditions

Your terms and conditions (T&Cs) are your first line of defence in protecting your business. Here are three key clauses that should be included in your T&Cs:

• Transfer of Ownership: State clearly that goods remain your property until full payment is received. This clause not only motivates prompt payment but also gives you the right to reclaim goods if the customer fails to pay.
• Failed Payment Clause: This clause should specify that you reserve the right to halt work or suspend deliveries if payments are missed. It should also clarify that you are not liable for any losses the customer incurs as a result.
• Interest on Late Payments: UK law allows businesses to charge interest on overdue payments. Including this clause in your T&Cs can serve as a deterrent against late payments and provides compensation for the delay in cash flow.

4.Monitor and Adjust Credit Control Policies

Your business environment and customer base are likely to change over time, and your credit control policies should adapt accordingly:

• Regular Policy Reviews: Schedule regular reviews of your credit control policies to ensure they remain effective. This could be done quarterly or annually, depending on the nature of your business.
• Stay Informed on Market Trends: Keep an eye on market trends and economic conditions that could impact your customers’ ability to pay. Adjust your credit policies proactively to mitigate potential risks.
• Customer Feedback: Gather feedback from your customers regarding your credit control process. This can provide valuable insights into areas where you can improve.

5. Timely Invoicing

One of the simplest yet most effective ways to improve cash flow is to ensure your invoices are sent promptly. Delays in invoicing can lead to delays in payment, so aim to invoice at the earliest agreed-upon date:

• Automation is a game-changer for improving cash flow through better credit control. It streamlines the invoicing process, reduces human error, and ensures that invoices are sent promptly. Consider the following:
  • Use Accounting Software: Invest in reliable accounting software that can automate invoicing, track payments, and send reminders. This not only saves time but also helps maintain accuracy.
  • Invoice Promptly: Don’t delay in sending out invoices. The sooner your customer receives the invoice, the sooner you can expect payment. Ideally, send invoices as soon as the work is completed, or the product is delivered.
  • Include Clear Payment Instructions: Ensure that your invoices include all necessary payment details, such as your bank account information, payment reference, and the due date. This reduces confusion and excuses for delayed payments.

6. Build Strong Relationships with Your Customers

Good relationships with your customers can significantly impact your credit control efforts. When customers value their relationship with your business, they are more likely to prioritize your payments:

• Open Communication: Keep the lines of communication open. Discuss payment terms openly before starting work and ensure there is a mutual understanding.
• Regular Check-Ins: Regularly check in with your customers, even when payments are on time. This builds rapport and allows you to address any issues that could affect future payments.
• Proactive approach: Consider checking in with a customer about 10-14 days after an invoice has been raised. Check that your customer has received the invoice and check if they have any questions or concerns. Addressing these early can prevent delays later.
• Flexible Payment Options: Consider offering flexible payment options, such as instalment plans, to customers who may be struggling to pay on time. This not only helps them manage their cash flow but also ensures you receive payment.

7. Handling Non-Payments

Even with the best credit control processes in place, some customers may still miss their payment deadlines.

It’s important to handle these situations with a balance of firmness and diplomacy:

• Soft Approach Initially: If a payment is a few days late, start with a soft approach. Call the customer to check if there were any issues with the payment process or if they need any assistance.
• Distinguish Between Risks: Identify whether the delay is due to a late payment risk or a potential non-payment risk. For late payments, apply gentle pressure to expedite the payment. For non-payment risks, consider stopping further service or product delivery to minimize your exposure.
• Document Communication: Keep a record of all communications with the customer regarding the overdue payment. This documentation will be valuable if further action is needed.

If you are managing your own credit control, then it’s vital to make sure your team are well trained.

• Consistency: Ensure that everyone involved in credit control is following the same procedures. Consistency is key to maintaining control over your receivables.
• Regular Updates: Keep your team informed about any changes in your credit control policies, such as updated payment terms or new credit limits.
• Performance Monitoring: Regularly review your team’s performance in managing credit control. Set clear targets, such as reducing the average days sales outstanding (DSO), and monitor progress.

The alternative to managing your own credit control is to outsource to an expert.

• Professional Credit Control Services: Hiring a professional credit control service can be a cost-effective way to manage your receivables, especially if you don’t have a dedicated finance team.
• Tailored Solutions: Many credit control firms offer tailored solutions based on the size and nature of your business. They can provide everything from basic invoicing to full debt collection services.
• Focus on Core Business: Outsourcing allows you to focus on your core business activities while ensuring that your cash flow is well-managed by experts.

8. Small Claims Court

If all else fails and a debt remains unpaid, you may need to take legal action. For debts up to £10,000, the UK’s small claims court offers a straightforward process:

• Prepare Your Case: Gather all evidence, including delivery confirmations, contracts, and communication records with the customer.
• Issue Notices: Before proceeding to court, send reminder, warning, and final demand letters to the customer. These steps demonstrate your effort to resolve the issue amicably and strengthen your case in court.
• Online Filing: You can file a small claim online, making the process relatively quick and simple.

While this should be a last resort, it is an effective tool for recovering unpaid debts.

Improving cash flow through better credit control is not just about chasing payments; it’s about building a system that proactively manages credit risk and ensures timely payments. By implementing these practical tips, you can significantly enhance your business’s financial stability, allowing you to focus on growth and long-term success.