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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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last modified: February 18, 2002