Credit Control Myths Busted

Over the years, I have discovered that credit control means different things to different people.

Whilst the underlying principle of getting money into the business is universally acknowledged, there are a number of beliefs and challenges that crop up again and again.

Below are some of these myths and the related reality.

Credit Control is Debt Collection

Credit Control starts once an invoice has been sent and is part of the day-to-day activity of the business.

Debt collection is the last resort. It’s where you go when you’ve exhausted all your efforts to get the payment. It is often the outcome of gaps in how the business monitors and manages trade credit risk.

It’s essential to have a process for debt recovery mapped out in your Credit Policy to support your credit control process in those odd cases where it becomes necessary.

It’s Not My Job!

Credit Management, and therefore credit control, is not the purview of a single individual or team in the business.

Whilst there may be a dedicated person or team to handle the bulk of the activity, everyone is responsible for protecting the bottom line, no matter their job title. After all, no profit, no business, which means no job.

Your Credit Policy should be embedded across the whole business, and everyone should be willing to step in to have those conversations to keep the cash flowing into the business.

Sales and Credit Control Have Opposing Goals

A very overused and annoying nickname is sometimes given to credit departments and credit control personnel… The Sales Prevention Team!

Ultimately, the purpose of sales is not to meet quotas or win incentives but to bring in cash for the business, which is the same goal of credit control.

The sales team make the sale. They do the leg work and convince customers to commit to a product or service. At this stage, it’s only a promise.

The credit department converts the sale into cash. After all, a sale is not a sale until it’s paid for!

Chasing Customers Will Only Upset Them

Whilst there will always be a minority who expect free stuff or try to get away without paying, it is commonly accepted that if you purchase a product or service, you are expected to pay for it.

Yet some businesses think getting tough or even asking politely for payment will run off customers.

I often hear, “we can’t chase too hard; they’re a big/good customer”.

But if they’re not paying, you’re supplying them for free. It doesn’t matter how much they ‘spend’ or how good they are because there is no benefit, only a cost to your business.

I’ve known businesses who would rather incur the cost of taking out a loan because they needed more working capital than ask a big customer, who had become friends, to pay what they owed!

If these customers choose to go elsewhere because you asked them to pay what they owe, are they really the right customers for you?

Credit control, done properly, is another opportunity to build on your relationship with your customers.

Being consistent with your credit control shows your customers that you are organised and professional and that they must pay their invoices; otherwise, further action will be taken. You don’t want to educate your customers that not paying your invoices is ok.

Credit Control Starts When The Invoice Goes Overdue

Good credit management starts with your first conversation before a sale is even made with your prospect.

Effective credit control starts the minute you send the invoice, and there are activities you can do before the invoice even falls due. Pre-due-date automated reminders and a quick courtesy call to check the invoice has been received can prevent late payment.

It’s Only One Day Late, So It Doesn’t Matter

I’ve heard this so many times.

So what you’re really saying is it’s ok to pay late.

Failure to chase your customer immediately will signal to them that it’s acceptable for them to be a few days late. One day turns into two, a week, two weeks, a month… see where I’m going with this?

Customers will test the boundaries of your business relationship and will come to expect the additional terms.

Suddenly you find you’re granting extended credit terms with no valid business reason or policy, which will impact your cash flow.

If there is a genuine business case for them to be on extended terms, formalise it so you can factor it into your cash flow forecasting and stop wasting your time.

They’re Good For It

Often said about bigger businesses, there is an assumption that because of their size, they are good for the money, so you’re happy to wait. You’ll get paid in the end, right?

Sitting back and waiting for your customers to pay on their own accord can be tempting. But this is a poor strategy for a couple of reasons.

Firstly you may not get paid at all.

Unfortunately, not everyone is as honest as you are. Some will avoid paying for as long as possible, hoping you’ll give up and write the debt off.

Others may get into financial difficulties. Then you find yourself in a queue with many other creditors behind HRMC, hoping to get paid eventually by the liquidators!

Secondly, the longer an invoice is outstanding, the less it is worth to your business.

The monetary value may be the same, but inflation diminishes its spending power. The additional costs you incur for chasing or not having it in your bank account erode how much of it is available to spend.

Don’t Let Your Customers Run Your Business

Remember, you get to choose who your customers are and how you want to do business with them.

Don’t accept poor payment practices as inevitable; stand up for your right to be paid on time!

Get in touch if you’d like to find out how good credit management can prevent late payments and improve your cash flow.

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