Combat payment arrears by going back to basics

Philip King FCICM, former Small Business Commissioner and advisor to PKF Littlejohn Advisory, believes a ‘back to basics’ approach would help many businesses tackle the problem of payment delays.

It is an established fact that companies often become insolvent, not because they are inherently bad companies, but simply because they run out of cash. Poor cash flow management, compounded by bad debt and slow-paying customers, are usually the cause.

But while it’s tempting to lay the blame squarely on late payments, companies must take some of the responsibility for their own poor credit management practices. In other words, best practice credit management can limit the amount to which a company is financially vulnerable.

How can bad debts be avoided and payments accelerated? A lot can be accomplished by going back to basics and doing the basics right.

Know your customer

First and foremost, even the most basic checks can prevent potential problems later on. Know your customer (KYC) should be the mantra of every director, every sales manager and every individual in your credit team. How well do you know the company you are doing business with? What is their company registration number? Do they even have one? What is their legal status? Are they a limited company? A partnership? A PLC? LLP? All such information is important, not least to ensure that you invoice the correct legal entity at the time your product/service is delivered.

It is always recommended to use data from reputable credit reference agencies to supplement the information held at Companies House. This allows you to dig deeper and get beneath the company itself. It will help you determine the amount of credit to extend, especially since their success and survival may depend on the stability of their customers and other suppliers.

In addition to published resources, there are also other tactics you can use to learn more about the business you manage. Checking out their social media accounts (LinkedIn, Facebook, etc.) and any comments around them can give you hints about their reputation and how they handle their supply chain. Traditional media reporting via Google searches can also give you a better understanding of their financial viability. Google Search can also show if the warehouse they say they own even exists!

Documented rules of engagement

Once a new client is taken on, the terms and conditions you agree to are absolutely crucial. They must be documented with explicit payment terms.

The concept of ’30 days’ – a particular favorite among politicians and the media for identifying best practice – can still mean different things to different people. For example, is that 30 days from the invoice date, receipt of the invoice or the end of the month? This must be crystal clear, otherwise 30 can easily become 50 or more.

When invoicing, make sure you understand their payment and invoice approval process and whether, for example, a purchase order is required and what other specific information may be needed. Make sure that the amount you invoice is also consistent with what was agreed; even a cent difference can bring the payment process to a standstill!

Customer interaction

In terms of how you interact with your customers: build strong relationships with key people in the company; they can be invaluable if you want to pay faster than other suppliers. On your side, you keep the general ledger organized and you have absolute clarity about which invoices are open. Confusion is a major obstacle to payment and can easily be exploited by those trying to delay what they owe.

Contacting us before the due date to ensure the invoice has been received and is correct will also reduce the chance that a payment will be disputed later. Keep large totals separate from smaller ones; there is nothing to be gained if a £10,000 invoice, consisting of £9,800 for the product and £200 for delivery, is held up because the delivery charges are disputed.

Even if you have clear lines of communication with the customers, always follow up on the day the invoice is due; never wait and hope for the best. Hope is not a strategy and someone else gets paid while you wait. Therefore, never be afraid to sooner or later forward a late payment to your collection team and/or a third-party activity. A customer who doesn’t pay you is not a customer worth having.

Ask for advice in a timely manner

Such advice should come as no surprise, but in my forty years of working in credit management, it still amazes me how companies are quick to blame everyone else when they themselves have ignored many fundamental issues.

Going back to basics may not always be successful, but just like winning the lottery, you have to buy a ticket first. And if, despite all your efforts, bankruptcy is looming, talk to the experts at PKF Littlejohn Advisory. They may be able to help the company avoid bankruptcy and, if the worst happens, they can work with you for the best outcome from the unfolding insolvency process.