Effective credit control for the small business

In this article, we discuss;

Set out clear payment terms and conditions from the outset
Send out invoices on time, every time and make sure they go to the correct person
Carry out credit checks on new customers and regular ones on old customers
Set up – and stick to – a late payment procedure
Ask for advance payment
Diarise payment reminders
Talk to your customers
Thank the customer when they pay
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Estelle Hardwick

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About Estelle Hardwick

Estelle is the Director of AMR, overseeing the Tonbridge, Tunbridge Wells and Chatham branches. She makes sure that AMR provides exceptional support to each and every client.

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If you’re running a small business, sooner or later you’re going to be faced with the difficult issue of dealing with late payments. Large companies usually have more leeway to manage these, but the impact they have on a small business can be severe; the worst case scenario could mean going into administration.

A report released earlier this year by the Federation of Small Businesses* found that on average throughout 2022, 52% of small businesses experienced late payment and 25% reported increased late payment. Of these, 37% were forced to apply for credit to manage their cashflow. The South East, along with the east of England, were areas in which the problem appeared particularly acute, and sectors which were affected most included construction, health and social work, transportation, education, admin, science, professional services, IT and the arts.

It’s a vicious cycle; you need the payments to carry on running your business, buy supplies, pay staff and HMRC, but at the same time you want to retain a good working relationship with the customer – so how do you manage the situation?

Person working on calculator and accounts spreadsheet

Effective credit control is one of the most important means of remaining solvent. Here, we provide our eight top tips for keeping control of the situation:

1. Set out clear payment terms and conditions from the outset

This is a crucial approach for avoiding misunderstandings later on. You should let the customer know exactly what work you will be doing, the length of time it will take, how much you will be charging for it, how you expect to be paid, and your late payment procedure. You should also state your payment terms and conditions, such as the amount of time the customer will be expected to pay within. The most common ones are Net 10, Net 30 or Net 60, which are the number of days allowed for payment following the date of the invoice.

2. Send out invoices on time, every time and make sure they go to the correct person

It may sound obvious, but when you’re rushed off your feet running your business, it’s easy to let bookkeeping slide and forget to send out invoices on time. If you invoice late, you’ll get paid even later. Also, ensure you send the invoice to the person whose responsibility it is to sign it off and get it paid.

3. Carry out credit checks on new customers and regular ones on old customers

It’s always worth checking the credit score of any new company you’re going to be doing business with. It will give you a good indication of its reliability, and the option of asking for advance payment if you have reason to be concerned. In addition, you should carry out regular checks on your existing customers in case their circumstances change.

4. Set up – and stick to – a late payment procedure

This should include your policy on giving credit to customers, the steps you will take in the event of a late payment and how you will go about recovering your money. You can offer a discount for early payment, but you must ensure you send out an up-to-date copy of the original invoice after this date has passed, so the customer pays the correct amount.

5. Ask for advance payment

This is particularly advisable if you are undertaking a large project. You may have to spend a considerable amount on buying in supplies, for example, so it’s a good idea to ask for an advance payment. In the event of a problem, you will at least have some of your costs covered.

6. Diarise payment reminders

Once an invoice has been sent off, it’s easy to forget about it and miss a payment deadline. Make a note of every invoice and, the day after the deadline has passed, send a reminder with a further copy of the invoice. If you do this consistently, customers are more likely to pay as they’ll know you keep a close eye on your accounts. Bookkeeping software such as Xero or Sage can save huge amounts of time, as invoicing and reporting can be automated. You’ll always know who has paid and who hasn’t, and some features will allow you to see when your emailed invoice has been opened – very useful if someone claims never to have received it!

7. Talk to your customers

If a customer is routinely paying late, pick up the phone and talk to them about it. There’s a time to get tough, but it’s always worth building a relationship and trying to find a way to work round the situation, especially if it’s a customer you want to keep.

8. Thank the customer when they pay

It takes very little time to say thank you, even if the payment’s late, but it can pay dividends in the long run. You’re confirming receipt of the money and hopefully finishing a job well done on a positive note.

At AMR Bookkeeping Solutions, sorting out a practical credit control system is one of the most important things we can do to help small businesses reach their potential. If you’d like to find out how our friendly and professional team can help you, why not call 01892 559480 or contact us through our website.

* Time is Money: The Case for Late Payment Reform by the National Federation of Self Employed and Small Businesses Ltd

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