One of the most crippling problems amongst small businesses is the excessive number of overdue payments. The average SME receives payments from other businesses two months late, and many suffer greatly from the delay.
The Guardian lists several tips for avoiding such situations:
- Don’t make credit management subordinate to sales–
Make sure the incentives you give o your sales team take credit into account and do not allow sales to overrule the people in charge of credit management. In very small businesses the two roles may not be distinct, but even as a sole trader you should still try to think about each prospective sale: once wearing a ‘sales hat’ and one wearing a ‘credit hat.’
- Treat credit management as an enabler of sales, not an obstacle–
The role of credit management should be to help you figure out a set of conditions under which you can say yes to selling on credit to each individual customer. Knowing as much as possible about the creditworthiness and payment habits of your customers, through a strong relationship and the use of credit information, can even help you win business by rewarding prompt payers.
- Develop a well-defined credit policy and stick to it–
It doesn’t have to be hundreds of pages long, or even a written document. Your policy does, however, have to be clear about when you are willing to give credit, how much and who to, as well as when exactly you would consider a payment to be overdue. Your policy must be known to all of your customer-facing staff and communicated in writing before each sale. When circumstances change, update the policy, don’t overrule it. Most businesses treat big customers differently and that’s fine, as long as you still have policies for those.
- See the big picture–
If you sell on credit, you are someone’s banker, so think like one. Giving credit is as much a part of your business as getting orders; a profit on paper may quickly turn into a loss after you add yo your costs the costs of financing your work capital, chasing up late payments, and absorbing non-payment. Try to have a good idea at all times of what that cost is.
- Be organized about invoicing and collections-
The invoicing and collections process turns promises into cash; don’t leave it to chance. Set up a routine for invoicing and collections (including polite reminders before the money is due) and stick to it. Some customers look out for signs of disorganization and use them to determine which suppliers they can get away with paying late; individuals may even use them in order to rationalize the fact that they’re paying you late. Make sure you don’t present yourself as the easiest or most deserving target.
- Know your customer-
Make sure you understand your customers’ payment process and the systems they use, and if possible get to know the individuals dealing with invoices. Ensure your invoices are designed to fit into their way of working. Some customers, especially large ones, will have no incentive to streamline their processes precisely because a convoluted payment process will allow them to pay late.
- Know your rights–
The law gives you, as a supplier, the ability to charge interest on overdue payments; you can calculate this using an online tool hosted on Business Link. This is easier said than done, but it’s still useful to clarify, in writing, that you reserve the right to charge interest. Some suppliers even do this automatically when debts become overdue, and invoice their customers for the additional interest right away. The point of this is rarely to actually receive the extra money, but rather to jolt customers into paying on time.
- Invest in professional credit management-
With credit management, having good staff really does make a difference. As soon as you are able to, make sure finance of credit staff receive training in credit management, or that you hire staff who already have.