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Published on 1 July 2011 by Tony Groom

Companies Are Failing to Manage Debt Collection and Credit Terms

Many companies are risking their own solvency and ability to carry on trading

because they are not managing their debt collection proactively nor are they

setting credit terms with their customers. And as a consequence they are suffering

from late payments, or worse write off due to bad debts.

While it may be understandable that difficult trading conditions prompt a company

to try to be accommodating with regular customers in order to keep their business,

this is plainly counter-productive when the amount they are owed keeps on climbing

and starts to affect their own cash flow.

The problem is compounded when they extend credit to customers who turn out to

be a bad risk because they have failed to carry out prior credit reference check

before extending a credit facility. If the company to which the money is owed is

itself borrowing money under a factoring or invoice discount facility then it risks the

invoice being recourse as a bad debt after 90 days. This means that the facility is

reduced by the amount borrowed on the recourse invoice which in turn has an

adverse impact on cash flow.

At its root the problem is the company’s own credit management where many

companies do not have a robust system in place from the start.

There are several key things that should be done and the first is to do a credit check

on any new customer it is proposing to take on. It should also regularly review its

existing customers’ credit levels at least once a year.

While a company may still decide to accept credit risk on a new customer, it will at

least be able to assess the value of the credit that should be extended to them if it

has checked their status first with a credit agency.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

Many companies also fail to manage payment of an invoice until after it is due. That

is the point at which they may discover that the invoice had never been approved

for payment in the first place or that there was another problem, which the customer

may have failed to raise, for example that the order was not fulfilled exactly as

required, or the invoice was not received!

A lot of the delay in receiving payment can be avoided by putting a proper process

in place that starts with finding out from the customer exactly how its payments are

made – for example does it pay by cheque or via online? are payments run on a

specific day, once a month? or is payment only made to those suppliers who shout

loudest?

It is important to know before carrying out any order precisely who authorises the

order both for completion and payment approval. Often the payment of an invoice

involves separate departments within the customer’s company.

Paperwork is crucial with having a procedure in place whereby the delivered/

completed order is signed for/ off with a clause on the document that includes

written confirmation that the customer’s requirement have been satisfactorily

fulfilled.

This will preclude the potential for a late payer to raise a problem with an order’s

fulfilment when it is too late to be able to check or verify. Plainly it is important to be

able to easily track the payment progress once the order has been completed and

signed off, triggering the rendering of the invoice so good record keeping and

numbering systems for identification are a must.

If, when the specified payment date has come and gone, the invoice remains

unpaid, matching the paperwork should be straightforward and the final step in a

robust invoicing system is to have a procedure for managing non paying customers

through putting a stop on processing any further orders and having an approved

debt collection procedure that includes litigation should this be necessary.

Too many companies fail to put proper credit management systems in place and

end up having to pursue debts through litigation that could have been avoided, or

worse end up not being paid which in turn can jeopardise the financial health of

their own businesses.

We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth. Our team has worked for over 20 years to help stabilise and return hundreds of businesses to profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors and use your company’s assets to pay themselves. We work for you, not creditors.

K2 Business Rescue The Emergency Service for Business

Call Tony Groom on 0844 8040 540

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