Credit Control - Manage Your Cash Flow
By Correct Balance LLP | Tuesday, February 26, 2013, 20:32
Cash flow is businesses life line, without it business dies.
What exactly is
Cash Flow = Money IN and Money OUT of business
How can we control
It can be tricky to control our cash flow. Most of the
time we are busy running business and we do not actually realise that some
customers did not pay or some suppliers are being constantly late with
Controlling Cash Flow is essential to all businesses.
There is no exception from that. Sometimes we can hear people saying:
"I am only small business so I do not really need to update and
review my cash flow every week or month".
Small businesses get in trouble with cash flow because
of attitude like that. On average small and micro businesses are run by one or
two people who are involved in absolutely every single task they have to
perform as a business. In that case it is very easy to miss one or two odd
clients being late with payment.
On top of that owners with attitude mentioned above
have got no idea when and how much money should be coming in and out of their
Effective control over cash
flow is the difference between Getting Paid or
Not Getting Paid and eventually becoming one of the debtors to our
suppliers, and going out of business.
We already know that the biggest danger in regards to
our cash flow, are late paying and not paying customers we may get or already
doing business with. All businesses which offer payments terms other than
upfront payment should keep Sales Ledger which in reality is a separate booklet
or yet another excel sheet (if we do not use any accounting software) with
names of the customers and amount of money they own. It is good practise to
have theirs payment terms written next to name just to avoid mistakes. Such
Sales Ledger should be checked and updated by you or person responsible for
bookkeeping in your business if you do not hire bookkeeper or an accountant.
How often you update Sales Ledger, it depends on your business and terms of
payments you have got set up with customers. However it is good practise to
check and update it at least every month, and send statements to your customer
with summary of any payments they have made, and missed.
Is that it?
Unfortunately running Sales Ledger is only the
beginning of Credit Control. There are other control measures we could put in
- Do not offer payments terms other than paying for
goods or services straight away to new customers,
- Prepare yourself separate calendar where you will
input all names of your customers against the date that way you will have
visual reminder and point of reference of how much money should be coming
in to your business,
- If your customer is a company registered with
Companies House you can check their annual reports on-line and make
decision based on that information,
- If your business is issuing invoices to its all
customers with later payment terms then it would be sensible to offer
shorter terms for new customers
- Make sure all your customers sign terms and
conditions of doing business with you, and know exactly what payment terms
they agree to
- Issue a gentle reminder that invoice is due to be
paid few days before dead line,
- CHASE ALL late payments
What if customer
is still not paying?
In this case you should seriously consider sending
formal reminder to customer giving him certain period of time to pay his
outstanding debt. Follow your reminder promptly and do not afraid to press
on your customer. If customer still does not pay send him Final Reminder and
start thinking how you will actually recover your money.
Recovering your money can be a lengthy and costly
process. Before you decide to use any drastic way such as using Bailiffs to
collect it, you could try more peaceful way and try to arrange with your
customer some kind of compromise which will benefit your client and get your
Whatever approach you take you must stay in contact
with your client and you should seek an update on your client's situation
regularly and very often.
How can I be sure
that Client is giving me a true image of his situation?
It is normal practise for clients who are late or not
paying that they will try to mislead you about their situation and they will
try to make it look like everything is going to be fine.
It would be nice if you could have a peek behind the
scene, wouldn't it?
Guess what, it is possible to actually check and
monitor your client's risk. Many accountancy and bookkeeping practices will do
credit control based on sales ledger reconciliation and will send reminders.
provide credit control which not only helps you make decision faster in regards
to taking appropriate action towards non paying customers, but also helps you
make more accurate decision in above matter.
So how do they do
Companies like Credit Safe provide credit rating and monitoring of your
clients. What it does in reality, it tells you if your clients had any previous
problems with payments, if they have any CCJ's on their account, also provides
you with financial reports from Companies House. Based on clients credit
history system like that will give you a risk score and even advice what
suitable payments terms you could use with a client.
They do not stop at one off check, they actively
monitor your client so you have up to date information every month or week if
you wish to. That keeps you ahead of the game and lets you have a peek behind
scene so you can understand why your clients are not paying or being late.
Systems like that come at certain price so not everyone
will use them but it is worth to shop around and find out if your bookkeeper or
accountant could perform check and on going monitoring of your clients and
suppliers if you need.
Thank You for taking an interest in this article,
please leave your comment bellow and if you liked it do not be shy and share
with people you know.
Patryk Machowiak - Correct Balance LLP
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