1. Know your Customer

Undertake some homework on your prospective Customer to help determine your future business decision-making.

  • Ensure you have their correct legal entity name if they are a registered company.
  • Ascertain who all other possible Directors are. Make sure they haven’t been involved in now defunct companies. If they have – this may affect your decision to extend credit terms or how you transact business at all.
  • Obtain a Companies Office search to ensure they are a viable company. Some companies in Receivership are still trading and may want credit terms extended. You need to decide if this may affect your business financially, either short term or long term.
  • Obtain a credit check against the Company and the Directors. This should be standard business practice. Any company who objects to this is likely to have something to hide.
  • Ensure you have the full name if they are an individual.
  • Obtain a credit check against an Individual to ascertain creditworthiness. If they object to this it is likely they have something to hide.
  • Full address, phone numbers (including personal mobiles), email addresses all assist with being able to effectively communicate with Customers. Where possible always ask for a physical address. It’s unlikely you will find them at the Post Office Box should you need to visit them personally.
  • Ensure all Customer details are spelt correctly. This can be a major issue for later enforcement proceedings.
  • Understand your Customers business and seek advice as to their expected level of business. This will help determine credit limits.
  • Conduct regular credit checks of all existing Customers
  1. Invest in a Credit Policy

Credit Policies are effectively a ‘best practice’ credit management tool for both internal and external parties. Most large organisations will operate with these but small companies can benefit from a written understanding for Staff to follow.

  • The Policy should be available to, and be followed by all relevant internal staff.
  • The Policy should be reviewed at least annually or on a regular basis to coincide with economic factors that may affect payment terms.
  • Relevant Staff should be given training on how the Policy is viewed and the expectations of it.
  • The Policy should abide by the Rules bound by the Privacy Act 1993.
  • The Policy should include steps for the credit check process and the acceptance and decline of extending credit terms.
  • Effective communication and support between relevant parties – both internal and external is paramount.
  • The Policy should outline the process to be followed for any accounts that are not paid once they reach 30, 60, 90+ days. This should include the expectation and consequence of proceeding to a debt collection process for non-payment, as well as additional costs that will be incurred.
  • If the account becomes a bad debt there should be a process to be followed for chasing and monitoring delinquent accounts. The company should also consider if they have the right staff to be able to deal with such accounts, or whether it should be out-sourced and at what stage this should occur.
  1. Consideration for Assessing Risk

Once credit checks have been obtained there is still an element of guessing and gut-feel regarding assessing whether to extend credit terms.

Questions to ask yourself:

  • Can they pay?
    Is the company operating as a going concern or is cash flow tight? If there is nothing in reserve and the company is not generating sufficient business for a healthy cash flow you need to consider the risk.
  • Are they financially viable?
    The capital of a company is the entire wealth either in the form of money or any assets they own. This is where a credit check is imperative. Paid up capital can give you an indication of their financial ability to pay as the liability is limited to that sum.
  • What is their cash flow?
    If the company you intend to deal with has debt problems and they are not able to meet your credit terms due to their own debtor’s non-ability to pay, cash flow will be an issue. Consider the risk to you and seek to understand their business.
  • Are there any other influencing factors?
    The current economic climate can influence any of the above especially if you are intending to deal with International businesses. Foreign exchange rates can also inhibit timely payment as companies juggle currency fluctuations.
  • Would it be economical to out-source credit management processes?
    If you have staff who are not comfortable contacting your customers to chase payment or don’t have enough staff to devote the time to this part of your business, you should seriously consider engaging a third party to utilise their experience and expertise in this area, and you should never expect sales staff to collect debt
  1. Check your Documentation

If your paperwork is up to standard there will be few loopholes as to why payment has not been forthcoming. Spending the time on setting up robust systems helps with getting paid sooner.

  • Start with asking for a Purchase Order Number, so that you know the order is legitimate. This prevents anyone just making an order/request. Many companies have issues with ex-staff still making orders well after they have left their employment.
  • Check the validity of your invoices. Your invoices should contain the following as standard requirements:
  1. Date of invoice – ie: the date of the request/order
  2. Payment terms and date – ie: the date payment is required (7days/14days/20th month following date of invoice/30days)
  3. Your Company name in full. Your legal entity should be stated
  4. Their Company name in full, and/or Partnership name/Individual name.
  5. Postal Address, and contact details of both parties – including email and mobile phone numbers. If there is a query your Customer needs to be able to contact you easily. Otherwise they will put off making the call.
  6. Description of Service/goods supplied – ie: be clear and concise on what was provided. If discounts were agreed include this so that there is little requirement to query the charges.
  7. GST number – should be quoted on all quotes/invoices/statements.
  8. Bank Account details – ie: for ease of payment many customers will make a direct deposit. Be clear on the expectation of information to be entered and advise your Customer of the Reference number to be used so that you can identify the payment on your bank statement.
  9. Terms and Conditions – this should be clear on the expectation of payment and also what may occur should payment not be made. It should outline all details of any defaults – ie: Any interest that may be charged, any costs that will be liable for collection/legal recovery. If this is not stipulated in your T’s and C’s, you won’t be able to recover them should you end up taking legal action for recovery.
  • Send a Statement at the end of the month. Statements should also outline the terms and conditions of payment, and the consequences if payment is not made within the terms.
  1. Be prepared to act on any policies in place should payment not be made on time. If interest is a chargeable option, ensure that you add this to the account. If stop credit is an option – do so. If you offer discounts for early payment, ensure that it is calculated and shown on any documentation.
  2. FOLLOW UP! Continually. Don’t delay.
  3. Make sure your credit team is trained. Not everyone can collect money – effectively. It is not a simple exercise and not every credit controller is effective in this area.

If all else fails, call the experts. We are happy to help, with simple and practical advice and solutions to enhance your business processes.