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Chasing overdue invoices is one of those tasks you have to do but don’t relish. The result is that it is an area of business administration which is rife with mistakes. Many of these mistakes are simple to avoid. Once upon a time when I had secured my first job in accounts I had the same task every morning. It was my responsibility to ensure a report, stating the cash balances in the business, was on the finance director’s desk everyday by 9.30am. At the time it seemed dull, laborious and old-fashioned. However, there was method to this perceived madness: you cannot run a successful business without exceptional insight in to credit control and cash flow.
The over-riding mistake of credit control
This leads to understanding the first mistake that many businesses make when it comes to credit control: they don’t give it enough importance. The business has grown, life is busy, so surely the invoices can take care of themselves?
With a good system in place, yes, the vast majority of invoices will take care of themselves, until you have a mountain and a hellish time of completing tax returns. However, it’s not the vast majority which are the problem. It’s the few which prove to be a thorn in your side, and these need a more thorough approach.
This is the biggest mistake. What else poses a problem for most businesses?
Treating all customers as a single group You no doubt know that customers like personalisation and a bespoke approach. You need to apply the same principles to credit control. The trick is to find out, in advance, how each customer processes invoices. Your accounting process needs to be flexible enough to send invoices in the way the customer wants. It maximises the chance of being paid on time. Therefore, avoid the mistake of making assumptions. Ask about how they like to receive invoices in advance. Ask for names and contact details. A little advance planning will prevent a great deal of legwork down the line.
Not having clear terms Again, never make assumptions – especially when it comes to payment terms. On the invoice set out how long the customer has in which to pay, along with any late payment fees. Ideally, your customer should agree to these terms before you even start work. Make things absolutely crystal clear.
Being tardy yourself You want your customer to pay you on time? Set a good example! You should invoice at the same time as final delivery of the goods or service. Why? Because there is then a clear connection between what they’ve gained and money owed. You’re also making a statement that you’re organised and professional.
Struggling with late payments It can be difficult for small businesses to assert with confidence that they will not continue working when an invoice remains unpaid. It is understandably unsettling, especially with particularly lucrative customers. However, by continuing to work when an invoice is outstanding, you’re digging the hole ever deeper. Speak to your customer and find out the problem. Perhaps negotiate different payment terms, but be firm and professional.
Forgetting that relationships matter Yes, it’s much easier to use your credit control tool such as Xero to bash out invoices in a fairly impersonal manner. However, when it comes to late payments, you’ll need to use both your technological tools and the relationship. Simply sending more automated reminders can easily be ignored. A phone call is much harder.
Forgetting your manners It takes nothing to send out a quick thank you for an invoice paid. This is a quick investment in the longer term relationship and ensures the next invoice is more likely to be paid on time.
Not meaning what you say You need to stick to your word. If you say in your payment terms that a late fee is added after 24 hours of an overdue invoice, you need to apply it. If not, your debtor knows that they can push your boundaries repeatedly. Therefore, always mean what you say as it will ensure you’re taken more seriously.
Getting swamped through lack of tools It’s all very well starting out with nothing more than a spreadsheet and a basic invoice template. Once you’re sending out considerably more invoices per month, credit control will start to become unmanageable if handled in this way. A common mistake is pushing on with a system which is no longer fit for purpose when there are plenty of other options available to you. Business accounting tools such as Xero make short work of your bookkeeping, and make credit control considerably quicker, easier and less prone to error.
Credit control needn’t be complicated or daunting. Avoid the common mistakes and make credit control work for you as we understand that there is little more important to our clients than having cash in the bank.
If you need help setting up procedures, drop me an email at active@activeledgers.co.uk to see how we can help you.