Extending credit terms to customers is a proven way of improving sales revenue, but it brings its own set of cash flow headaches. As the old adage says, “A sale is not a sale until the money’s in the bank”.
You should aim to create a balance between a credit policy that’s sufficiently liberal to generate sales but at the same time minimises late payments and bad debts. This balancing act is called credit control, and it can be mastered in five easy steps.
1. Clearly define your payment terms
Your invoices should clearly state when you expect to be paid. Typical payment terms are 7,14 or 30 days after invoice date. You may want to set varying payment terms depending on each customer’s creditworthiness, and offer discounts for early or prompt payment or impose penalties for late payment.
If possible, protect your cash flow by setting payment terms for customers that are shorter than the terms you receive from your own suppliers.
2. Issue invoices promptly and follow up late payment
The sooner you send your invoice, the sooner it’s likely to get paid. Aim to issue invoices as soon as delivery of goods or services has occurred – while the delivery is still fresh news – to reinforce your expectations of timely payment.
Send a friendly email reminder for payments more than two days past due for 7-day accounts, four days past 14-day terms and 7 days past 30-day terms. Follow up with a personal phone call if you get no response. You may need to suspend further credit until overdue invoices are paid.
3. Perform creditworthiness checks
Before extending credit to a new customer, you need to assess their creditworthiness by obtaining the following information:
Their correct legal entity name (e.g. individual, partnership, company) rather than just a trading name
Number of years in business
Contact names, phone numbers, addresses, email addresses
Three references from businesses they have traded with recently
Contact each trade referee to enquire about your potential new customer’s payment history and any problems that may have occurred.
4. Review your credit policy
Your credit policy should cover existing customers as well as new ones, and should be reviewed regularly to consider and, if necessary, update:
Clarity of design of invoices and statements1
Payment types accepted (e.g. cash, cheque, EFTPOS, BPAY, credit or debit card)
Global or individual customer credit terms
Early payment discount, late payment penalty
Late payment reminder process
Individual customer credit limits
Creditworthiness check procedures
5. Consider trade credit insurance
Trade credit insurance is a specialised product that protects businesses against non-payment by customers who become bankrupt or otherwise insolvent, by paying out 75-95% of the invoice amount, depending on the terms of the policy. You can choose to protect your entire turnover (with possible exclusions) or selected customers only.
Contact your broker for more details about trade credit insurance and insurance premium funding.
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