There is no simple formula for credit control: it is a question of constant diligence. By Neil Macdonald
Neglect has been the cause of many business failures. It can happen that a business places itself at risk by the problem of rapidly mounting debtors accounts, particularly where one or two major clients who have previously proved reliable encounter cashflow difficulties.
This phenomenon is particularly evident in times of tight liquidity, when even long-standing clients can let a company down. The business’s reluctance to call a halt, and to withhold the supply of goods and services until some arrangement has been made to settle the arrears, is likely to cost them dearly, and place their own futures in jeopardy. Experience shows that this particularly applies where major building and construction contractors are involved.
Clear credit guidelines should be established prior to accepting business. Where relevant, these should include a Romalpa Clause in the Conditions of Sale, ie an agreement whereby the goods supplied remain the property of the supplier until paid for. However, the goods must be identifiable and, in the case of a liquidation, quick action needs to be taken to establish ownership.
The time to address the issue of overdue accounts is the moment they go into arrears, when a satisfactory arrangement for the settlement of outstandings should be made. All this may seem obvious, but it is amazing the number of suppliers who are either reluctant to act, or who are ill-informed as to the current state of their outstanding accounts, and fail to remember that no business is better than bad business. Any fool can give goods away. It takes a lot of extra turnover to pick up the profit lost in bad debt write-offs.
When a client becomes evasive, puts off returning calls, and fails to keep promises, is the time to act. It is easy to get engrossed in the daily issues of running a business and neglect this important aspect of the company’s finances. It should be remembered that the diligent supplier gets paid first. The farther behind a client gets, the greater grows the risk of getting nothing.
One of the easiest ways to lose clients is to allow their accounts to run too high. When they encounter difficulties, they go elsewhere, and invariably they only return as a last resort. Often, rather than lose their business and have them go to the opposition, leaving your account owing, it is better to enter into an arrangement with the client to temporarily freeze the amount outstanding with an agreement that you will continue to supply. Also it needs to be arranged that the outstanding sum will be progressively reduced on an agreed basis, with current deliveries paid for when due. This procedure has worked satisfactorily with some companies, and ultimately enabled them to establish long-term supplier/client relationships.
While the establishment of credit limits for clients is a satisfactory way of instituting control, it is essential that the necessary controls are in place to ensure that the value of goods for delivery is established prior to dispatch, and that the monies received are speedily registered to avoid costly errors.
Mistakes can easily occur unless all the relevant people on your staff clearly know the guidelines. It is vital that regular reporting on the state of the debtors is transmitted to all levels of management, including the Board, who should be regularly briefed on the subject.
Consultants should be cautious when undertaking their investigations as they can be easily misled (mushroomed) when verifying both creditors and debtors balances and outstandings. Executives, on occasions, have been known to supply deceiving information. On one occasion group tax and penalties amounting to close to $1m were intentionally concealed from both the incoming board and the consultant.
These comments are meant merely as an introduction to the subject and to provide a few useful hints. All consultants and business managers should take the time and effort to make themselves conversant with the legal aspects associated with priority payments, and other aspects of credit management.