Getting Paid On Time And Debt Recovery When The Credit Crunch Bites
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Undoubtedly the best credit control initiative is to arrange the sales
invoicing such that customers pay up front for goods and services. Despite care
taken to exercise credit checks on new customers the actual payment experience
is often more valuable in practise.
New clients can be asked to pay in advance by issuing pro forma sales
invoices for the initial orders until credit checks are complete. In businesses
which involve the supplier incurring costs prior to invoicing such as purchasing
materials for a job then it is logical the terms of trade should require the
client to pay an upfront deposit to cover this expenditure.
The majority of business is conducted on a credit basis and the terms of
supply and payment of goods and services should be clearly stated in a set of
trading terms the potential customer should sign and agree to before trading
commences. The terms of trade should state clearly the effective date an invoice
becomes payable, credit allowed and the interest that may be charged in the
event of late payment.
When credit is tight during a credit crunch the money supply reduces and the
cash flow of every business is affected. Business which have a lack of credit
control over sales income suffer the most as other businesses take advantage to
supplement their own cash deficiencies and liquidity problems. The solution is
to review and set a clear financial policy the business will follow.
The first step in a credit control system is to ensure customers want to pay
in advance and within the agreed terms. The very best way to achieve early
settlement is to make the settlement in the interest of the client and money is
in every businesses interest.
A potential solution would be to offer a cash discount for early settlement.
Offering a cash discount for early settlement adds another valuable tool to the
credit control procedures as the debtors who do not take up the potential of
paying lower prices are most likely to already have cash flow problems and
credit should be restricted.
The financial policies of a credit control system should include accurate
accounting records and the prompt issuing of sales invoices and the regular
production of customer statements. Clients who go over the allowed credit limit
must be sent a series of credit control letters worded to ensure the customers
take action to pay the outstanding invoices.
Credit control letters should be sent at predetermined intervals and each
should indicate the amount outstanding should be paid immediately by escalating
the effect on the business relationship if payment is not made.
Such an escalation may be an initial statement of the amounts due for
payment. Many accounting and bookkeeping departments use the supplier statements
to schedule payments rather than individual sales invoices. Personal contact
with the supplier accountant or bookkeeper can assist early settlement.
The first letter should advise the debtor that the standard terms and
conditions have been exceeded and request payment to maintain a sound trading
relationship. The next credit control letter might advise the sales debtor that
late payment penalties and interest payments will be invoked if payment is not
made.
In the UK there is a statutory right under the Late Payment of Commercial
debts (Interest) Act 1998 to charge debtors interest on late payment and also
claim reasonable debt recovery costs. The right to exercise this statutory right
does not apply if the terms and conditions of the business set out different
debt recovery parameters. Unless the terms and conditions or sales invoice set a
different credit term then every commercial invoiced is due after 30 days.
In the UK the interest rate a business can charge is fixed twice annually on
30 June and 31 December using the base rate as the reference rate and then is
applicable for the following 6 months. A rate fixed on 31 December is applicable
from 1 January to 30 June of the following year.
The interest rate to be charged would be the Bank of England base rate plus 8
per cent. If the base rate is 5 per cent on the reference date then the amount
that can be charged would be 5 plus 8 equals 13 per cent.
In the UK there is a set schedule of reasonable debt recovery costs that can
be charged to late paying customers. These costs are 40 pounds for debts under
1,000 pounds, 70 pounds for debts between 1,000 and 10,000 pounds and 100 pounds
for debts over 10,000 pounds.
If the client chooses to ignore being charged extra for non payment then the
next letter should advise the debtor the future orders will be placed on stop
until the account is brought to order. Such action by the supplier may harm
future sales but it is better to restrict the financial exposure to the sales
already made than continue to extend credit where the prospect of never being
paid may become a reality.
If payment has not been received by this stage then a serious situation has
developed. The customer has not paid on time causing the business a reduction in
cash flow. The debtor has also indicated by non payment action that increased
costs through interest and penalties is preferable to paying and finally that
they are prepared to risk not receiving further goods and services.
At this stage the supplying business has to consider legal action to recover
the outstanding balance. The amount outstanding is at risk and legal debt
recovery should be invoked to avoid the whole balance becoming a bad debt which
may never be recovered with the consequential effect on both cash flow and net
profit.
About the Author
Terry Cartwright, accountant at DIY Accounting, designs UK Accounting
Software at
http://www.diyaccounting.co.uk/ providing accounting solutions for small to
medium sized business and bookkeeping software at
http://www.diyaccounting.co.uk/bookkeeping.htm
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Article Published/Sorted/Amended on Scopulus 2008-03-07 07:18:43 in Business Articles
