Cash flow problems result in costly overdraft charges and bad debt. In a worst-case scenario, this can even lead to business failure.
Despite this, businesses are still making mistakes when it comes to implementing and following through with credit control procedures. Here are the 10 biggest credit control traps these organisations fall into – and how to avoid them.
Lack of accountability
Companies need at least one staff member dedicated to credit control matters. This reduces the risk of having to write off bad debts, which can cause business difficulties.
It’s also good practice to encourage accountability throughout your organisation – the finance department is no different.
Incomprehensible payment terms
Business’s payment terms need to be crystal clear. It’s important to reinforce your payment terms on your website, invoices and contracts.
If you don’t already, ensure that customers are aware of the consequences of late payment. This can go a long way towards keeping your cash flow constant.
Late invoices mean late payments. If an organisation invoices its customers at a sluggish pace, payments won’t come in on time and cash flow will dry up.
Human errors will happen. If you process invoices by hand, mistakes will become an inevitability. For this reason, it’s important to have a robust, timely system in place to manage your customer invoicing.
Again, human error can be costly for any organisation, and it’s important to minimise it as much as possible. Any mistakes on an invoice will halt the entire process, doubling the time it takes to receive payment.
Worse still, unscrupulous companies and individuals will use invoicing errors as an excuse to avoid paying at all. You can avoid this by removing the human element from the process with financial management software such as PS Financials.
The longer an invoice is outstanding, the harder it is for your business to collect debt. Left to their own devices, your customers – and their debt – will fade from view.
By chasing invoices early in the process, you can stop this from happening.
Lack of new customer checks
Credit checks are essential, especially in the B2C market. Without credit checks, your company exposes itself to the risk of delayed payments.
In the absolute worst case, customers may even default on their payments, leaving you out of pocket.
No credit limits
Without sensible credit limits, you’re setting yourself up for a huge fall.
From your new customer credit checks, determine how much you’re willing to risk on each customer, and set an upper limit.
Aggressive credit control
If you demand payment before payment terms have been reached, customers may knee-jerk react and leave their payments until the last possible minute.
It’s better to ease customers in gently.
Passive credit control
Similarly, you don’t want to go too far the other way. Some customers will genuinely forget to make a payment; a gentle reminder will prompt the customer to pay.
When it comes to payment terms, you also need to be strict. If a customer has overdue debt, don’t give them more credit – it’ll only make the situation worse for both of you.
Ignoring struggling customers
Unpaid debt is a sensitive issue. Credit control can be a time-consuming and highly administrative process, and it’s easy to miss the warning signs of a struggling customer.
You can free yourself from huge administrative burdens by adopting recent advances in technology. If you’d like to learn how PS Financials’ software packages can help you to ace your credit control, visit our website or get in touch today.