The simple answer is when it is owed by a debtor!
All the hard work has been done; the product or service has been delivered on time and at the agreed price and all that remains is for the customer to pay.
It sounds simple, but, until the hard cash is in the bank, a pound of sales on the books might not be worth a pound of cash in the bank!
There are several issues which can surface and often end up hitting a business' finance hard if proper systems are not implemented at the outset. These include:
- Bad debts
- Discounts taken
- Goods returned
- Spurious disputes
- Late payments
These all significantly erode the value of outstanding invoices which were expected to be paid. The risk of many of the above can be reduced by the implementation of simple risk procedures (click on the links for more):
1. Vetting customers
Bad debts not only wipe out profits, but also take away valuable turnover, which can be difficult to replace.
Vet your customers by looking at the following:
- Put in place a proper customer-vetting policy for both new and existing customers.
- Use a credit referencing agency such as Experian, Dunn & Bradstreet or Credit Safe. Their extensive knowledge will assist in setting a suitable credit limit and stick to it.
- If a customer wants more, insist on outstanding invoices being paid before further work is undertaken to keep them within the limit.
- Management can use the recommended credit limits from the agencies to take the emotion out of any refusal to increase the limit if necessary.
- For new customers, management should ask the question: “Why do they want to deal with me”? Have they exhausted their credit with their normal suppliers or on stop because they cannot or will not pay?
- Consider taking out credit insurance which can protect against customer failure.
- Take references from other suppliers or insist on proforma sales until comfortable.
Remember, time taken choosing customers carefully at the front end can pay dividends in the long run!
2. Implementing terms and conditions
A strong set of terms & conditions of sale is a must to ensure the sale is ultimately collectable. Apply the following to safeguard every transaction:
- At the account opening stage, have the customer sign an acceptance of the terms & conditions to avoid future dispute.
- Ensure they are clear and concise with little wriggle room.
- If this cannot be achieved, implement an order confirmation process where the company reply to the customers purchase order accepting the order on their terms & conditions.
- Don’t leave it until the invoice stage as it will be too late. T&C’s need to be in place before the work is done to be effective.
Also it’s worth considering the following:
Extended payment terms demanded – Agreeing extended payment terms costs a business money as all the cost of providing the goods or service including staff wages will have to be outlaid before the customer pays and most businesses will have to use borrowing to cover the cashflow gap. If extended terms are required the business should try to build in a margin to account for the additional cost of funding.
Discounts – Businesses can consider early payment discounts to get the cash in fast. Just be sure the customer doesn’t take the discount and still take the credit terms.
Retrospective rebates / volume discounts - They might be taken by larger customers and can be a shock when they are suddenly knocked off the value of outstanding invoicing. This is especially true if the cash expected was intended to pay other bills. Make sure any such agreements are transparent and when and how they are to be taken. They can then be planned for and taken into account when assessing cashflow.
Goods returned – For the avoidance of doubt, have a specific 'No Sale' or 'Return/Exchange' policy to avoid dispute.
3. Invoicing and proof of delivery
Disputes, spurious or not, tie up cash! Avoid such issues with the following:
- Have a robust proof of delivery / sign off system in place to ensure there is documentary proof the customer has had the goods or service delivered and signed to accept it. This can avoid later spurious claims, used to delay or avoid payment.
- Send the invoice out promptly once the goods or service has been delivered and state that any disputes must be received in writing within seven days if they are to have any legal standing.
- Make sure credit terms are clearly stated on the invoice.
4. Credit control
Effective credit control systems are required to keep on top of customers who are slow to pay their invoices. There is a fine line between keeping the customer happy and allowing them to use their suppliers to fund their own business.
Make sure you put in place a standard procedure for chasing the outstanding invoices including monthly statements, successive letters and telephone calls requesting payment.
And above all, make a diary log of all calls and responses!
Remember, a customer is only a good customer if they pay!
By tightening up internal procedures now, companies can at least attempt to prevent problems occurring before they arise and ensure their pound of sales does indeed turn into a pound of cash in the bank.
If you'd like to discuss how your business can implement better credit control systems and improve its business finance levels, why not give our team of experts a call on 0845 602 9354