Why you need a credit control system
A credit control system may sound like something that belongs in a big company, but in fact, the smaller your business, the more critical it is to establish clear rules for which customers get credit and under what circumstances.
There are two main reasons for this: cashflow, and the stress of chasing unpaid invoices.
Credit control and cashflow
It is no exaggeration to say that cashflow is the single biggest threat to the survival of small British firms. The longer you have to wait to get paid, the higher your risk of defaulting on your own financial commitments.
Dramatic improvements can be made to a business’s cashflow by collecting the money more quickly. There are several steps that could help accomplish this, such as:
- Requiring full payment in advance where possible
- Requiring a portion of the fee in advance if full payment is not possible
- Offering incentives for early payment
Chasing unpaid invoices
Few things cause more headaches to the freelancer or small business owner than having to chase clients for unpaid invoices. There are different reasons why clients may withhold payment, such as financial difficulties, poor organisational skills, a dispute over the work provided, or simply because they think they can get away with it!
Your credit control system needs to pre-empt all of these circumstances, and pursue the debt in the most efficient way possible. A proactive, rather than reactive, debt collection policy is absolutely essential.
How to create an efficient credit control system
Credit control is largely an administrative task, and your goal should be to automate as much of the process as possible. Modern accounting software like Xero enables you to set up customer records which you can programme to record their credit terms, send invoices, and issue a series of reminders when payment becomes overdue.
There are also some manual steps you should take to tighten up your credit control policy:
- Credit check all new clients to determine whether they qualify for credit from your business. If they have a poor credit history, think carefully before extending credit to them. You don’t need to tell them they failed a credit check: you can simply say your policy is to take full payment in advance for new clients.
- Set a credit limit for every customer. Even established customers shouldn’t automatically qualify for unlimited credit. Go through your customer database and set a limit on the credit facility you are willing to offer to each of them.
- Have a contract. In the event of a dispute, you may have to go to court to get paid. It will greatly help you to be able to show a clear and detailed contract setting out the work to be provided, the fee and the payment terms. Such a contract also helps avoid any misunderstandings about credit terms in the first place.
- Confront bad payers. If you have customers who habitually pay late, take action: you can refuse to extend further credit until all outstanding invoices are settled; or, if the customer is proving to be a liability you can politely inform them you will no longer be able to supply them.
If you’re worried that some of these measures will put off potential clients, rest assured that the only kind of clients who will be put off are the kind that don’t want to pay you! Good customers appreciate good credit control, because it is the hallmark of a well-organised, professional business – of any size!
