Successful Credit Management During a Pandemic – Part Two
Welcome to the 2nd of our series of blogs to help you improve your ‘Order to Cash’ process in a practical way and reduce the negative effects of the pandemic on businesses.
To review our 1st blog in the series ‘Assessing Credit Risk’ click here.
We continue to look at the elements that make up the Order to Cash process to help you understand what areas of your business should be reviewed and strengthened and how to implement those improvements.
- Collection strategies
As well as re-assessing risk, it is advisable to re-assess your collection strategies.
As mentioned in the Assessing Credit Risk stage, we recommend assigning a customer type to each of your sales ledger account. The customer types is based on risk and also how payment is collected. For example, you may have basic Customer Types model of:
- High value– Collection strategy is more calls less emails
- Low value– Collection strategy is more emails less calls
- High Risk– Short timeline to suspending account and sending a Final Demand letter.
Don’t forget all new customers should be treated as High Risk until you build up payment history with them.
Other Customer Types with different collection strategies might be:
- Direct Debit customers
- Sub-contract customers– construction industry specific, an application for payment is issued instead of a VAT invoice.
- Government bodies– Generally more bureaucratic than business and may need additional steps in collection strategy to get invoice authorised.
- Invoice portal customers – common in large retailers and other larger companies.
Review all customer’s current contact details as they may have changed with many people working from home. Confirm the most up to date email address to send invoices, statements and reminders
Don’t be afraid to call a customer before the invoice is due. The tone of this call should be different to a collection call. It should be more of a ‘customer service’ call, confirming your customer has received the invoice and there are no disputes.
Many companies will have cash flow issues at the moment. If you want to consider agreeing a payment plan with your customer, here are a few guidelines:
- Ring fence arrears and insist of payment of new invoices in full and strictly to payment terms
- Confirm the value of each payment and dates payments should be received, cleared funds in your bank
- Make it clear that any default on the agreement will result in the full amount outstanding becoming immediately due for payment.
- Add interest to the outstanding amount and calculate over the term of the repayments.
- Get your customer’s express agreement in writing to the terms of the payment plan, this creates leverage if they default on the agreement.
Lower value Accounts
Automate the collection process as much as possible. Investigate the opportunity of investing in software that will allow you to bulk email statements and reminders.
Direct Debit– offer a discount for payment by DD. This payment method is particularly useful for low value accounts, especially if your services are a similar monthly value.
Consider making DD mandatory for higher risk accounts, if you weigh up the collection time/ cost against the profit of those transactions you may well be making a loss, it may be prudent to refuse the business if your customer is unwilling to pay by DD.
Credit sanctions should be built into your collection strategies. Some sanctions you may consider imposing on late paying customers are:
- Suspend provision of goods/service – basically put your customer on ‘Stop’ until payment of the account has been brought up to date. This will reduce your potential risk to further bad debt. Giving your customer notice of potential suspension is useful leverage. Make sure your terms and conditions give you the right to suspend service for non -payment or you may find you are in breach of contract.
- For Construction contracts, there are specific steps you must follow when considering suspending the provision of service. Make sure you comply with these steps to prevent any damages being claimed against you by the main contractor.
- Interest and compensation– you can charge interest and costs on all overdue debts. If you don’t have any mention of interest on late payment stipulated in your terms and conditions, you can rely on the Late Payment of Commercial Debts (Interest) Act 1998 and charge 8% above base rate plus a fixed amount of ‘Compensation’. Informing your customer in advance that interest will be applied to their debt if you don’t receive payment by a specific date, is useful leverage to encourage quick payment.
- Withdrawal of credit terms- you may want to consider advising your customer that unless payment of the account is brought up to date and all future invoices paid on time, you will consider putting the account on a pro forma basis.
- Letter Before action- see stage 4 for more details.
Just to mention, all communication with customers should be in a customer focused way and include sales when considering credit sanctions. Sales can often speak to their contact to put pressure on their finance department to get your debt paid more quickly.
Watch out for our next blog, “Dispute Resolution Management”
To gain a deeper understanding of some of the areas mention in our blogs, we have some free factsheets and are offering a free Credit Reference Agency Report. Click here for more details
To find out more about our services, click on the relevant links below:
- Support service– From as little as £30 per month
- Training– Low cost webinars and courses to help you improve cash Collection performance and how to use the Court’s Small Claims process.
- Outsourced collections– We become your virtual Credit Control department. All communication with your customers is carried out in your name
- Debt Recovery– Speak to us about our contingency fee service
- Consultancy– Review and strengthen your ‘Order to Cash’ process in a practical way and coach your staff to improve performance and cash flow.
Or just call us on 03332 413 203, email Contact@cmgroupuk.com