Following up on the articles
>>> How To Increase Cash Receipts In A Cash Flow Forecast
>>> How To Get Payments In Advance From Customers
we will look at credit control and the issue of…
How To Get Credit Customers To Pay Faster
There are two issues with collecting the cash for sales made on credit accounts:
- the agreed credit period – when payment is due.
- getting the money on or around the agreed payment date.
Agreed Credit Terms
There are three issues here:
- Should the customer have credit?
- How much money are you prepared to lend to the customer?
- How long will you wait for payment?
There is no automatic right to being allowed to buy on credit.
It surprises me how easily businesses will agree to give customers significant credit terms (because they are desperate to get the sales order) when they themselves would have to jump through a lot of hoops to borrow the same amount of money from a bank.
Is the customer a good credit risk?
- Is the business is financial secure?
- Are the transactions are nicely profitable? The lower the profit, the more risk the business is taking.
Sometimes the customers are so powerful that they will enforce their payment terms (e.g. the retail giants may insist on 90 or 120 days credit).
You have to decide if you want to sell on this basis or whether you should be targeting a different type of customer who are prepared to pay much quicker.
I could write a lot about how the relative bargaining powers of buyers and sellers can make a big impact on the profitability of a business (and industry). It comes down to who needs whom more?
How To Get Customers To Pay To The Agreed Terms
Getting the customer to pay close to the agreed terms is also worthy of a detailed article but here are the basics.
- Invoice quickly and correctly.
- Isolate anything controversial onto another invoice – that way the big payment can’t be held up for a small detail.
- Correct problems quickly – delivery errors, quality issues, pricing disputes.
- Give big invoices special attention and walk them through the customer’s system and get a specific payment promise date.
- Follow up quickly if payment was not received close to the due date.
- Get tough and make payment a matter of honour – you bust a gut to deliver on time, the least you expect is payment.
Threaten legal proceedings and carry out the threat if necessary. A commercial decision is needed here because this action could lose the customer but regular late payments may mean the deal is unacceptable.
How To Monitor Your Credit Control
The two main ways of monitoring the effectiveness of your credit control procedures are:
- A calculation that converts the outstanding value of debtors (accounts receivable or sales ledger balances) into an equivalent number of days sales. This is called Days Sales Outstanding (DSO) or Debtor Days.
- Reporting the value of overdue debts in absolute value and as a percentage of the credit sales for the month.
The totals at the bottom of the aged debt report, which allocates the accounts receivable to the months the sales were made, can also be used. A problem arises if different customers have different payment terms but it is an easy way to track what is happening if there are standard terms like “payment by the end of the month plus 30 days.”
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