Managing Credit Control

Credit Control and Cash Flow

Good quality of credit control is crucial when it comes to liquidity and cash flow, which is why when giving credit a customer's financial standing is the only thing that matters.

Businesses do not usually fail on the back of a small bad debt, so the bigger the customer the more rigorously their credit-worthiness must be checked. What follows provides a few examples of how this can be done and interpreted.

Checking Credit Worthiness

Bank and trade references should always be taken out before opening a new credit account but credit control should not stop there. The following should also apply:

1). If the customer is a limited company, view their entry on companieshouse.gov.uk.

2). Company information showing accounts or returns "made up to" as overdue should be regarded as a warning sign.

3). Download annual accounts – Most small and medium sized business accounts are short form.

4). If not a limited company - run a commercial credit check.

Commercial or sole trader credit checks are widely available online. These should disclose court judgements. Downloading annual accounts (shown on the form as as "aa") from companieshouse.gov.uk cost £1.00 each.

How to Read Short Form Accounts

Small and many medium sized companies are allowed to file short form accounts. These do not include a profit and loss or net income statement.

This should not matter because the short form balance sheet values, which are shown are all that good credit control needs. If net assets (equity) are negative, the company is insolvent, if net current assets (working capital) are negative the company is at risk of becoming so, if it isn't already.

Low levels of working capital do not always spell risk but if the likely levels of credit to be extended are significant a commercial credit report including court judgements for debt, if any should be taken out.

Time Limits for Claims and Credit

Your payment terms should be stated on all transaction documents, i.e. order forms, invoices, delivery notes and statements.

These should also include advising a reasonable period (e.g. fourteen days) from the date the goods have been delivered within which any notification of claims or disputes can be accepted. As accounts become overdue you should put a stop on credit sales until late payments have been settled: If late payment gives cause for concern, rerun and review credit control checks.

Dealing with Overdue Accounts

Monthly statements are followed by written demands for payment if the account becomes overdue. The perceived wisdom is three letters or emails, each one more forceful than the one that went before. Telephoning is also recommended.

When you are pressing for payment, any intervention on the part of a non-financial officer (e.g. a buyer) that is not positive where paying your bills are concerned should be regarded as a definite red light.

The essential point is that however you approach credit control, if you don't get an undertaking to pay whenever you make contact or if undertakings to pay are dishonoured; spending more time and money on collection becomes pointless. This would definitely be the case if an overdue account reaches sixty days past its due date. If you wish that can be less.

Certainly when an account reaches sixty days past due, credit control will need to be replaced by the threat of legal remedies. The customer should then be given fourteen days' notice of court action. However you advise the customer of this, a confirmation letter by recorded delivery should also be sent .

Telephone Calls Strategy

It should not be forgotten that the sole purpose of telephoning is to obtain an undertaking to pay an overdue account - Anything else should be regarded as an irrelevance. Brief details of the outcome of any call should be noted.

Calls that consistently fail to make contact with whoever is responsible for paying the bills should also be noted. A record of a consistent inability to make contact can be helpful if legal action is called for.

Preparing for Court Action

When credit control has failed your only option is to take an overdue account to court. If it is for £5,000 or less this can be done through the small claims court, which is a lot easier than you may imagine. A solicitor is not necessary for this.

At this point however you must first ensure that all of your paperwork is in good order. This will include delivery notes, invoices, copies of all correspondence and notes on telephone or other contact details. If applicable these must also evidence the resolution of or reasons for the rejection of any disputes.

You are also entitled to claim interest at 8% plus the Bank of England base rate (e.g. in 2012 8% + 0.5%), court fees, reasonable expenses and statutory compensation. As failure to pay on the due date is a breach of contract, you can include all other outstanding amounts, even though they may not yet be overdue.