10 Facts about Credit Management your Business Needs to Know
Your Credit Management function is vital to your business to maintain positive cash flow and reduce the risk of bad debt. Read below, our guide to 10 facts about Credit Management your business needs to know for the benefit of your cash flow.
1. Late payment accounts for £32.4bn owed to SMEs, according to BACs research
This figure has dropped from £39.4bn in January 2014, but is certainly still an astronomical figure that needs to be drastically reduced.
2. 59% of businesses surveyed by BACS were unaware of measures in place to help them tackle late payment
Late Payment Legislation is a great way for SMEs to charge interest on late payments that is backed by law; if you are wary how the use of this Legislation might affect the business relationship with your customer, we recommend using it as leverage to encourage prompt payment.
3. 80% of money owed to your business is usually tied up with 20% of your customer base
Known as the Pareto Principle, this also means that 80% of your time is spent chasing 20% of your customers. We certainly recommend prioritising your time so that you can adequately chase the 20% of your customers who owe you the most money.
4. 86% of the telephone collections is all in the tone
Only 14% relies on the actual words you say, your customer is more likely to react positively to your chaser phone calls if your tone is positive. Even over the phone people can hear when you are smiling, and you won’t believe the effect this can have on whether a conversation goes well or badly.
5. Closing chase phone calls is almost as important as the call itself
You and your customer must know what the next step will be following a phone call, we recommend that if you have not been able to achieve payment from this first phone call that you diarise a follow up call, agree with your client and appropriate time and date to do this, and ensure that you stick to your promises.
6. Despite connotations, credit control should be a customer focused role
All credit control should add to a customer relationship, not detract from it; by having a positive relationship with your customers, this in itself can potentially encourage payment. We would always recommend that you try your best to aid your clients in any queries they may have, by doing this you will ultimately have issues resolved sooner and therefore be paid quicker.
7. The older your debt the more difficult it will be to collect
We would always recommend quick action for unpaid invoices, left long enough this money owed can turn to bad debt. It may also be useful to point out that there is a six year statute of limitations on taking legal action for unpaid invoices; after this six years has passed your business has no option but to write the payment off as bad debt.
8. Court action can only be taken once all necessary pre-action protocols have been carried out
You run the risk of having your claim struck out or penalised in costs if it is perceived that you have not taken a reasonable approach to collect payment prior to taking legal action.
9. Even though you know that your customer owes you money, without adequate evidence it is possible that your customer may win during legal action
Thorough and detailed documentation of the entire business relationship is highly recommended, ensure you have evidence of the acceptance of your T&Cs and absolutely provide as much detail within court documents as you can, this will reflect well on you and can encourage the judge with his or her decision during your case.
10. You can charge debt recovery fees onto an existing debt when taking court action against delinquent debtors
Thanks to the changes to Late Payment Legislation you can now add on debt recovery fees to your debt should you take legal action. I should mention however, you can only charge reasonable recovery fees if you have hired a third party to retrieve the debt, and the definition of ‘reasonable’ is at the judge’s discretion; however, again, this is a great form of leverage to encourage payment from your customers.
For expert information and useful resources to aid your business’ credit management function take a look at our Credit Management Toolkit