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Getting Paid On Time And Debt Recovery When The Credit Crunch Bites

By: Terry Cartwright

Undoubtedly the best credit control initiative is to arrange the sales invoicing such that customers pay up front for goods and services. Despite care taken to exercise credit checks on new customers the actual payment experience is often more valuable in practise.

New clients can be asked to pay in advance by issuing pro forma sales invoices for the initial orders until credit checks are complete. In businesses which involve the supplier incurring costs prior to invoicing such as purchasing materials for a job then it is logical the terms of trade should require the client to pay an upfront deposit to cover this expenditure.

The majority of business is conducted on a credit basis and the terms of supply and payment of goods and services should be clearly stated in a set of trading terms the potential customer should sign and agree to before trading commences. The terms of trade should state clearly the effective date an invoice becomes payable, credit allowed and the interest that may be charged in the event of late payment.

When credit is tight during a credit crunch the money supply reduces and the cash flow of every business is affected. Business which have a lack of credit control over sales income suffer the most as other businesses take advantage to supplement their own cash deficiencies and liquidity problems. The solution is to review and set a clear financial policy the business will follow.

The first step in a credit control system is to ensure customers want to pay in advance and within the agreed terms. The very best way to achieve early settlement is to make the settlement in the interest of the client and money is in every businesses interest.

A potential solution would be to offer a cash discount for early settlement. Offering a cash discount for early settlement adds another valuable tool to the credit control procedures as the debtors who do not take up the potential of paying lower prices are most likely to already have cash flow problems and credit should be restricted.

The financial policies of a credit control system should include accurate accounting records and the prompt issuing of sales invoices and the regular production of customer statements. Clients who go over the allowed credit limit must be sent a series of credit control letters worded to ensure the customers take action to pay the outstanding invoices.

Credit control letters should be sent at predetermined intervals and each should indicate the amount outstanding should be paid immediately by escalating the effect on the business relationship if payment is not made.

Such an escalation may be an initial statement of the amounts due for payment. Many accounting and bookkeeping departments use the supplier statements to schedule payments rather than individual sales invoices. Personal contact with the supplier accountant or bookkeeper can assist early settlement.

The first letter should advise the debtor that the standard terms and conditions have been exceeded and request payment to maintain a sound trading relationship. The next credit control letter might advise the sales debtor that late payment penalties and interest payments will be invoked if payment is not made.

In the UK there is a statutory right under the Late Payment of Commercial debts (Interest) Act 1998 to charge debtors interest on late payment and also claim reasonable debt recovery costs. The right to exercise this statutory right does not apply if the terms and conditions of the business set out different debt recovery parameters. Unless the terms and conditions or sales invoice set a different credit term then every commercial invoiced is due after 30 days.

In the UK the interest rate a business can charge is fixed twice annually on 30 June and 31 December using the base rate as the reference rate and then is applicable for the following 6 months. A rate fixed on 31 December is applicable from 1 January to 30 June of the following year.

The interest rate to be charged would be the Bank of England base rate plus 8 per cent. If the base rate is 5 per cent on the reference date then the amount that can be charged would be 5 plus 8 equals 13 per cent.

In the UK there is a set schedule of reasonable debt recovery costs that can be charged to late paying customers. These costs are 40 pounds for debts under 1,000 pounds, 70 pounds for debts between 1,000 and 10,000 pounds and 100 pounds for debts over 10,000 pounds.

If the client chooses to ignore being charged extra for non payment then the next letter should advise the debtor the future orders will be placed on stop until the account is brought to order. Such action by the supplier may harm future sales but it is better to restrict the financial exposure to the sales already made than continue to extend credit where the prospect of never being paid may become a reality.

If payment has not been received by this stage then a serious situation has developed. The customer has not paid on time causing the business a reduction in cash flow. The debtor has also indicated by non payment action that increased costs through interest and penalties is preferable to paying and finally that they are prepared to risk not receiving further goods and services.

At this stage the supplying business has to consider legal action to recover the outstanding balance. The amount outstanding is at risk and legal debt recovery should be invoked to avoid the whole balance becoming a bad debt which may never be recovered with the consequential effect on both cash flow and net profit.

Article Source: http://www.newagelivingarticles.com

Terry Cartwright a qualified accountant at DIY Accounting in the UK designs UK Accounting Software on excel spreadsheets providing complete Small Business Accounting Software solutions with single and double entry Bookkeeping Software for both limited companies and self employed business

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