9 Tips for effective credit management
Debt recovery is an important tool for any business, large or small, in order to maximise cash flow. But what do you do when debtors simply refuse to paid their debts, or when they are simply being obtuse? The following are a number of tips which will assist any person in the role of a credit manager in order to stay on top of debtors and ensure effective credit management. We have identified 9 simple tips for effective credit management.
Tip 1 for credit management – Ensure you have adequate terms and conditions
Some businesses do not use terms and conditions in order to maximise business as they are under the impression that making clients sign terms and conditions may potentially scare them away.
A good terms and conditions needs to be no more than 2 or 3 pages at the most, if properly drafted. The key terms should serve to protect your businesses rights should the client default in payments, or fail to fulfil their end of the bargain and make things easier down the line when recovering debts. Key terms include terms of payment, recovery methods, interest, indemnity, guarantee or charging clauses and termination clauses.
Tip 2 for credit management- Clear Terms of Payment
Ensuring clients are aware of your businesses terms of payment is an important step in ensuring that you are paid on time. A good suggestion is to have them clearly displayed on your invoices or bills as a reminder of the terms of trade (in conjunction with being displayed in the terms and conditions given to the client prior to engaging in business with them).
Good credit managers should ensure clients follow their terms of payment and should be wary of granting any extension to those payments, in order to avoid reinforcing client’s belief that paying late is acceptable.
Terms of Payment should be simple and reflect the types of invoicing your business engages in. For example larger lump sum invoices should be 14 – 28 days (2 to 4 weeks) while smaller invoices should be 7 days. It is important that you do not alter your terms of payment and remain consistent with your billing.
Tip 3 for credit management- Avoid Classifying Overdue Invoices
Invoices that have not been paid within the terms of payment are overdue. Good credit managers should not confuse their clients by labelling their debts as 30, 60 or 90 days overdue as this will suggest that the terms of payment are not due by the lapse of the business’s terms of payment.
Tip 4 for credit management – Stay on top of debtors
A debtor will enjoy nothing more than not hearing from their creditor that an invoice is overdue and payable. Ensure you consistently remind a debtor that your invoices are overdue when they are and precisely how much is due at the respective times. Good practice is to send brief reminders prior to an invoice falling due. For example:
“Dear John Smith
Your account in this matter is due on DD/MM/YYYY.
As you know you are able to pay your account by the following methods:
We look forward to hearing from you.”
By providing the client with constant reminders and of your methods of payment, you will ensure that a debtor will remain up to date with their invoices. Regular reviews of a client’s account and diarised reminders will prompt you to regularly check your client’s accounts and ensure that no debt goes unnoticed.
Tip 5 for credit management -Due Diligence
A credit manager should always do their due diligence on any new client before engaging in business with them. Simple checks can be performed online using google searches, LinkedIn searches, Veda and Creditor watch or ASIC searches in terms of a company to see if it is solvent.
Ensuring that you are well informed about who you enter into business with will ensure that there are no nasty surprises when it comes to invoicing for services or goods you have provided to the client. The Federal Court offers a search, online, for bankruptcy proceedings or sequestration orders made against individuals, which is a useful tool at a good credit manager’s disposal. The search tool is available at https://www.comcourts.gov.au/public/esearch/disclaimer.
The Australian Securities and Investment Commission (ASIC) offers a free search service which will inform a credit manager if a company they are about to enter into business with is solvent. The online resource is available at https://connectonline.asic.gov.au/RegistrySearch/faces/landing/SearchRegisters.jspx?_afrLoop=1341245388263758&_afrWindowMode=0&_adf.ctrl-state=7e9umdutt_4.
Information is power. A good credit manager will ensure that they understand the structure of their client. Are they a company? If so do you know who the directors are, their contact details, the company’s registered office, what type of company, who is the authorised agent etc.
Ensuring that you have correct information on your client will enable you to maintain contact and relations in the event of reminders, defaults or networking opportunities.
Tip 6 for credit management – Customer Service and Transparency
Often, a client will receive an invoice and be completely surprised with the amount they are being charged. A credit manager would be no stranger to a client who believes they have been over charged and refuses to pay their bill.
Ensuring the client is informed of their account at different stages of the engagement will ensure the client is not surprised on billing day. A useful tip is to itemise invoices so that a client knows precisely how their bill is broken down. The client will appreciate that they are included in the process and the honesty you afford them and will be more agreeable to paying as they know how far their dollar is going. An example of you itemisation could be as follows:
|Date||Staff Member||Description of Service/Goods||Amount|
|9.02.2016||John Smith||Removed the engine head from the engine block and checked the engine for water leaks (approx. 1 hour of labour)||$100.00 (at hourly rate of $100/hr)|
|10.02.2016||Kerry Smith||Polished the chassis and inspected for dents and scratches (approx. 15 mins)||$15.00 (at hourly rate of $60/hour)|
Tip 7 for credit management – Reinforcing Words with Action
If in the event you are required to enforce a debt, do not threaten action that you do not intend to follow through with. Reneging on promised action when enforcing debt suggests to your client that you do not intend to pursue them and that you are not serious.
If you send a letter of demand and threaten legal action in order to recover the debt, ensure that you are prepared to follow through.
Tip 8 for credit management – Remain Professional
Ensuring your payments are met and recovering debts from clients can often be frustrating and unfortunately, on occasion, clients can personally attack when reminded of their outstanding debts. Ensuring that you remain positive, friendly and professional will ensure that any high-pressure situation is quickly defused.
A useful tip, in relation to speaking with clients over the telephone when pursuing missed payments is to politely end the conversation if it becomes too heated and telephone again at a later time in order to allow them to calm down. Not only will this assist with preserving the professional relationship but also help in preventing you from saying or writing anything regrettable or unprofessional in the heat of the moment.
Always ensure that you are prepared to answer any rebuff the client may potentially have in a polite and professional manner and have a general understanding of their business so as to address any potential questions as to “what have you done for me” or “why is my bill so high” or “what has been done about so-and-so”.
Tip 9 for credit management – Be Assertive and be Strict with Deadlines
Remaining assertive and not taking no for an answer is an important approach when corresponding with clients in relation to outstanding invoices. A useful tip is to insist that they provide to you a timeframe for the payment of any outstanding debt and diarising that date accordingly and inform them of your internal procedures for enforcing debts in the event that that they do not meet those deadlines.