If your business doesn’t have a credit policy it should get one or create one as soon as possible. The main benefits of good credit management policies are to ensure a business maximises credit sales with the minimum amount of risk. Credit risks should be identified to reduce the risk of sales going wrong and invoices not being collected in accordance with agreed terms. Your credit policy should detail the requirements you have set for your terms of payment. Recent research suggests that UK SME’s are owed on average £130,000 in late payments. In the last 12 months as much as 20% of all invoices issued by small to medium sized businesses were paid late. The percentage of businesses paying their suppliers late increased from 41% to 47% in 2020. Over 50% of UK SME’s rely on customers paying them to ensure that they in turn can pay their own creditors.
After more than a year of trying to run businesses with reduced sales or with the lack of access to support or funding many businesses are now pinning their hopes of recovery on a rapid increase in sales when all restrictions are lifted on 21 June. However, that hope will only come to fruition if businesses have enough cashflow to support the initial increase in sales. Another potential risk to recovery is whether the end of the furlough scheme at the end of September with have a positive or adverse effect on already struggling companies. If you are owed money by a company that has furloughed the majority or all of its staff, then when the scheme ends they will be trading from a standing start with no cashflow to fund the business whilst it gets “back to normal”. Sadly many businesses will become insolvent and will cease trading. Who knows what will happen to the estimated 4 million workers that are currently paid via the furlough scheme.
However, it is not all doom and gloom. More than half of small businesses are now more aware of how business funding works, having possibly utilised the Government schemes such as the Bounce Back Loan and the CBILS loan. Almost 55% of businesses are now much more likely to seek advice regarding finance for their business than they would in previous years. As the economy reopens there are a number of essential tasks you should implement if you haven’t already done so:-
1) Know your customer (also known as KYC). Ensure you know who you are trading with. Is it for example John Smith, or John Smith Limited, or John Smith and Sons trading in partnership. Credit reports are readily available online for a small fee.
2) Create a set of payment terms that will make your clients aware of how long they have to pay your invoices. Always issue your trade credit terms to new clients before the first order. Don’t be afraid to retrospectively issue terms to all your existing clients.
3) Ensure you are invoicing your clients effectively and accurately. An incorrect invoice will delay payment. It is worthwhile contacting your clients before an invoice is due for payment to confirm they have received the invoice and to enquire when the invoice will be on the payment run.
4) Know when to chase payment and assign responsibility for chasing to a specific member of staff if you don’t already have a credit controller within your business.
5) If all efforts fail, seek professional advice from a solicitor or a debt collection agency.