Credit Monitoring and Cash Collection
It is obvious, but also surprising how many businesses fail to send invoices quickly and accurately to their customers.
Set Credit Limits
You should set an upper credit limit for all customers and this limit should be based on references and your own knowledge of the customer's business.
Monitoring Credit Limits
The way you monitor outstanding debts will depend upon the sophistication of your financial systems. A good accounting packing will produce a detailed report showing the ageing profile of the amounts outstanding from each customer, whereas a small business might simply file unpaid invoices in date order, so they can see at a glance which is the oldest.
Either way, you should set aside a regular time (each week if possible) to chase outstanding invoices. You should concentrate on the largest debts, followed by the oldest and any where you suspect the customer might have problems.
Always keep a record of any problems you have with collecting monies owed by customers. If they use delaying tactics, let them know you are aware of what they are doing.
Days Sales Outstanding
A very useful indicator of credit risk is "days sales outstanding". This is the total value of debts outstanding divided by your total annual revenue multiplied by 365 days. If you calculate this on a monthly basis and find that the number of days is increasing, it means that customers are taking longer to pay you. Investigate and correct any underlying problems.
Common Warning Signs
Your customer may be getting into difficulties if their pattern of payment behavior changes.
- Payments get delayed.
- Customer tries to make payments on account (part payment of the total amount due).
- Discounts being taken when not allowed.
- Penalty changed incurred are not paid.
What happens if a customer exceeds their credit limit?
If anyone exceeds the limit you set, review the situation carefully because it might indicate problems. If the amount owed has increased simply because of a higher volume of purchases you might simply want to increase their limit (but no higher than the amount recommended in their credit report).
If a customer is at the maximum credit limit recommended by their credit report, you should either:
- Require them to clear some of the existing debt before processing their next order.
- Ask for advance payment of the amount exceeding their credit limit.
- Insist on cash or letter of credit payment.
Delayed Payments
Customers will often try to delay payments. This may be a danger sign, but is often due to a customer wanting to improve their cash flow at the expense of your own.
Cash Collection
Try not to give your customers an excuse for not paying on time:
- Ensure invoices are accurate and sent to the correct address.
- Call customers just before payment is due to confirm they will be paying on time.
- If a customer make a payment on account (part payment), acknowledge receipt and request that the balance be paid. Consider stopping further credit until the debt is repaid.
- If a customer queries one item, insist on full payment for the rest of the order.
- If a cheque is incorrect call the customer to point out the error and ask for a replacement cheque to be issued immediately.