Credit management is an important function for all businesses.
Good credit management will require you to have a system in place to 1) monitor and plan when payments are likely to be received and 2) to plan when you have expenditure and have commitments to pay.
Cash Flow Forecasts
If you just deal with matters on a day by day basis, you might unexpectedly find that your business is unable to meet a payment it needs to make.
Even a simple forecast of what income and expenditure is expected over a future period is better than nothing at all. If you can use a forecast to spot potential difficult periods, you can plan ahead and potentially take steps to borrow or move more flexible payments to another more convenient date.
Each business will be different in terms of what its payment terms are with customers. Some businesses will be paid in advance or upon an order being placed. Some will provide customers credit and if that is the case, ideally the payment terms will be clear as to when payment must be paid by.
Avoiding giving credit is preferable but your judgement and experience needs to be exercised as to whether you would lose customers if you did not provide credit.
The obvious risk in providing credit is that customers fail to pay. If that happens, our courses teach you what steps to take.
Some expenditure, such as paying tax can be planned for. You will know the particular date it needs to be paid in all likelihood you will know well in advance of that date the amount.
Other expenditure, might be more difficult to predict when it will be incurred, or incurred at all. For example, a repair to equipment or legal costs of litigation.
It may be worthwhile factoring in a figure per week of unexpected expenditure, to give a little more breathing room to meet unexpected payments. The bonus of that is that if the contingency amount is not incurred there should be more cash flow available.
Credit Management Top Tips
- Prepare a cash flow forecast on a weekly basis, for a period that is reasonable and sensible for your particular business. We would suggest 6-12 weeks ahead.
- Prepare a budget of expenditure for the forthcoming year on a month by month basis. So the anticipated income and expenditure each month, for the forthcoming 12 months.
- If you do provide customers credit, have robust systems in place to diarise when a payment has become overdue.
- Have a system of steps to follow to recover payment, whether that being picking up the phone, statements of account, email reminders, formal letters or a mixture of several.
- Take action to recover overdue invoices and do not be afraid to use the courts. Our courses teach you how. Statistics show that the older an invoice becomes, the less likely it is to be paid in full or at all so do not delay in taking action.