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Credit control

What are the points to con­sid­er when tak­ing on a new cus­tomer? Sim­i­lar points may arise in regard to your sup­pli­ers. If you are start­ing, or have recent­ly start­ed a busi­ness in the Lanark­shire area we, at Rus­sell & Rus­sell, can help you man­age the cred­it require­ments of the busi­ness.

Obtain­ing new cus­tomers is great for busi­ness, unless they fail to pay you. If you fail to check that the cus­tomer can sup­port the amount of cred­it you are grant­i­ng, then com­menc­ing legal action when they do not pay can be a long, drawn out and poten­tial­ly cost­ly process.

If pay­ment from the cus­tomer is not obtained and the goods or ser­vices have been pro­vid­ed, your cash flow is like­ly to be under pres­sure. Ensur­ing that cus­tomers pay on time will make man­ag­ing your busi­ness eas­i­er.

If you fail to pay your sup­pli­ers because you have not been paid by your cus­tomer then you could also be dam­ag­ing their busi­ness as well. This is not only bad busi­ness prac­tice but could be regard­ed as cor­po­rate social irre­spon­si­bil­i­ty. Treat your sup­pli­ers as you want your cus­tomers to treat you.

Factors to consider

The first thing you should do is get to know your cus­tomer. This should start before you take on a new cus­tomer and before you give them any cred­it. The bare min­i­mum of what you should know is:

  • the exact name of the cus­tomer and the trad­ing address (con­sid­er using Com­pa­nies House Webcheck ser­vice)
  • their type of busi­ness struc­ture, e.g. are they a sole trad­er, a part­ner­ship or a lim­it­ed com­pa­ny?
  • names and per­son­al address­es of the pro­pri­etors if their struc­ture is unin­cor­po­rat­ed (con­sid­er ver­i­fy­ing let­ter head­ed paper to sup­port this infor­ma­tion)
  • con­tact oth­er sup­pli­ers to obtain ref­er­ences
  • their cred­it rat­ing through a cred­it agency.

Before you pro­vide goods or ser­vices to any cus­tomer make sure you address the fol­low­ing:

  • dis­cuss and agree pay­ment terms with the cus­tomer before accept­ing the order
  • agree the terms in writ­ing
  • review any doc­u­men­ta­tion from the cus­tomer where they try to change the agreed pay­ment terms
  • nego­ti­ate and agree pay­ment terms with sup­pli­ers before accept­ing the order
  • if there is a gap between cus­tomer and sup­pli­er pay­ment terms, con­sid­er whether finance is avail­able to bridge the gap (this will require an under­stand­ing of your work­ing cap­i­tal man­age­ment)
  • pro­duce a cash flow fore­cast cov­er­ing all expect­ed income and expens­es
  • have a stan­dard pol­i­cy in place to ensure that pay­ment terms can­not be altered with­out appro­pri­ate autho­ri­sa­tion
  • ensure that you have the right to apply late pay­ment and inter­est charges on invoic­es.

After you have pro­vid­ed goods or ser­vices to a cus­tomer ensure that you:

  • raise invoic­es prompt­ly
  • raise invoic­es accu­rate­ly to ensure all items are includ­ed at the quot­ed prices
  • include a ref­er­ence num­ber for the order and then quote this if any dis­pute aris­es
  • have every­thing the cus­tomer requires on the invoice
  • have a process for chas­ing invoic­es
  • have a process for deal­ing with dis­putes
  • keep a log of dis­putes to ascer­tain whether sim­i­lar dis­putes for cus­tomers occur
  • ensure that your invoic­es are ful­ly com­pli­ant with HMRC for VAT pur­pos­es.

Consider your suppliers — treat them as you would like to be treated

Remem­ber that not pay­ing your sup­pli­ers on time is a bad busi­ness habit and it may result in a drop in your cred­it rat­ing. You should:

  • ensure you advise your sup­pli­ers of any dis­putes as soon as they occur
  • pay on time by ensur­ing that your cred­i­tors’ ledger is accu­rate­ly aged and
  • keep your sup­pli­ers up to date with any issues you have with pay­ing on time.

Some busi­ness­es unfor­tu­nate­ly go ‘bad’ so you may wish to con­sid­er obtain­ing cred­it insur­ance where the busi­ness:

  • would not be able to func­tion if key cus­tomers went insol­vent
  • does not have the con­trols in place to ascer­tain whether a cus­tomer is like­ly to go insol­vent
  • is strug­gling to obtain infor­ma­tion on prospec­tive cus­tomers
  • needs to improve cred­it man­age­ment
  • is con­sid­er­ing a new mar­ket ven­ture.

Busi­ness­es should con­sid­er obtain­ing fac­tor­ing and financ­ing options when:

  • insuf­fi­cient cash reserves are avail­able to pay sup­pli­ers on time
  • the busi­ness needs to grow
  • the lev­el of short term finance (includ­ing any over­draft facil­i­ty) is insuf­fi­cient
  • staff do not have the right lev­el of cred­it man­age­ment skills.

How we can help

If you are strug­gling with cred­it con­trol in these dif­fi­cult times then we would be hap­py to dis­cuss this fur­ther with you. If you are start­ing, or have recent­ly start­ed a busi­ness in the Lanark­shire area please con­tact us at Rus­sell & Rus­sell for more detailed advice.