Credit Control - Manage Your Cash Flow

Credit Control

 

Cash flow is businesses life line, without it business dies.

 

What exactly is

Cash Flow?

 

Cash Flow = Money IN and Money OUT of business

 

How can we control

it?

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

deliveries.

 

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

business.

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

place:

 

• 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

  IMMEDIATELY

 

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

money back.

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.

However some accountants and bookkeepers teamed up with companies like Credit Safe and

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

it?

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.

 

Regards

Patryk Machowiak - Correct Balance LLP

 

 

We are also advising to get your hands on "Getting Paid for Dummies" - it is a limited

edition for free so get it quickly.