Good customers & bad payers.
One of the best ways of 'keeping on top of your cashflow' is
to get your customers to pay you upfront for any products or
services that you wish to sell.
In most industries, however, it is common practice to provide
the goods or services first, and then await payment, and then
await payment, and then await payment, and then await payment.......
:o(
This article outlines some of the main information sources,
tools and 'business practises' that will enable you to assess
& monitor the credit-worthyness of potential and existing
customers, and then react accordingly.
It was written by CreditSafeUK.com, online suppliers of commercial
credit information.
Credit Management Guide for Businesses
By Ray Ruffels, CreditSafeUK.com
www.CreditSafeUK.com
info@CreditSafeUK.com
© Copyright 2002
The impact of a professional Credit Management policy on the
performance of your business has never been greater especially
with recent developments in Information Technology. The use
of the Internet as a marketing and distribution channel has
greatly enhanced the availability and timeliness of commercial
credit information.
Advances in statistical credit risk scoring has complimented
this process providing easily accessible high value third party
credit decisions which will form an important part of your credit
management policy.
These developments represent a new generation of credit checking
services where businesses of all sizes and industries can afford
to make informed and confident credit decisions. This is made
possible by wholly Internet based companies such as Creditsafeuk,
which not only utilize the most recent advances in IT, but also
keep costs down by shedding all overheads that are not vital
to their products. Customers should not have to pay for their
provider's overheads, says Ray Ruffels Creditsafe's UK director,
at creditsafeuk.com they pay for the credit check, nothing else.
Credit Management Policy
Customer Assessment
Both new and existing customers should be assessed so that
sales effort is focused on areas, which will have a positive
impact on profitability and economic return. Your existing and
potential customer base could be segmented to establish overall
quality by looking at the following areas:
• Solvency - financial strength of your customer
• Liquidity - ability to pay debtors on time
• Profitability - level of customer profit
• Future- prospects for the business
A Credit Score will help build an appropriate customer management
strategy that could:
• develop the business relationship or partnership
• be a strategy to increase sales or margins
• tighten terms of trade and keep on constant monitor
• trade out or even close business relationship (when rating
is very poor)
New Business Accounts
Firstly, all new business accounts should be credit assessed
to help decide appropriate credit limits and payment terms.
Secondly, create the appropriate legal and trading terms with
the potential customer by establishing the following details:
• Name and address (trading name and address)
• Any separate address for invoices and statements
• Proprietors or partners full names and home addresses
• When a limited company - the company registration number
and registered office
• Information on parent/holding company
• Type of business premises (ownership or lease)
• Credit referees: bank name, address and telephone number
• Trade referees
• Credit limit requirements (immediate and future)
• Signed agreement for normal business terms and conditions
including payment terms
Creditworthiness
In order to understand a company's performance and prospects,
an examination of its financial figures and basic trading information
is necessary. The following sources of information are available
to assess your customer's financial strength and ability to
pay for goods sold and delivered:
• Bank reference: references can only be obtained with
written authorization from your prospective customer, this may
take time and may not be wholly reliable.
• Accountant's reference - again information may not be
wholly impartial.
• Trade reference-may not be representative because some
companies only deal promptly with selected suppliers, who provide
the reference, but are slow with others.
• Documents legally deposited with the Companies Registrar.
• A commercial credit report: the most complete, fair and
consistent source of information, to facilitate trade credit,
with a third party credit score
Setting the Credit Terms
The credit terms can be in stated as follows:
• Due within a number of days of receipt of invoice or
• Due within a set number of days after the end of the
month in which the invoice was received
The ratio of "debtor days" - the average time your customers
take to pay their bills, is a good indicator of the credit behavior
of your customer base. The credit terms you set may be determined
by previous customer history, market sector, competitors terms
and type of contract. For example, if credit history is poor
then credit terms should be tightened from standard period and
procedures implemented to closely monitor customer behavior.
Credit Terms for individual customers may vary based on credit
history, for example, strategic customers can be awarded extended
terms but ensure the credit controller or the finance director
agrees variations in terms.
Monitoring
This is a particularly useful tool when statistically it is
proven that most insolvencies occur in your existing customer
base.
• Monitoring via a business information provider such as
creditsafeuk.com who will advise you of any changes to your
customer's credit position or if any County Court Judgements
have been registered.
• Customer review in person
• Field sales research
The Collection Process
The following procedures should be used as part of your credit
collection process:
• Telephone management
• Reminder letters
• Credit statements
Create a customer management plan and make regular calls to
the person responsible for payments. Obtain information on payment
systems and frequency of cheque runs and set up alert systems
to action any follow-up. If reminder letters are required, which
should be initiated at a certain number of days overdue, always
send the final reminder to a senior manager/director such as
the Finance Director and state that a solicitor or collection
agent is about to be instructed.
Credit Management Performance
Several indicators of performance can be utilised
• Number of invoices paid after the due date in relation
to size of customer base.
• Bad debt level as a percentage of turnover
• Debtor days ratio
• Aged debt profile
These indicators should be assessed over time and any areas
showing a deterioration can be attended to quickly and professionally.
Further information
Please contact Anna Kelly on 020 7749 8050, if you have any
questions specifically related to this article.
www.CreditSafeUK.com
info@CreditSafeUK.com
© Copyright 2002
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