Credit and tough economic times

With the credit crunch and the financial crisis providing the backdrop for recession there are now great concerns for the economy. Research shows that small businesses are now more in debt now than at any time since the late 1990's. Those with a turnover of up to £1 million now owe around £1.60 for every £1 of turnover, compared with £1.17 debt per pound of turnover ten years ago.

Since the drastic economic reversal since the 2007 credit crunch bankruptcies have increased and cash flow has, for many small business owners, become much tighter. In reality the reduction in credit coupled with concerns of deflation have resulted in an economy that is difficult to trade in due to the great uncertainty.

To make matters worse, small businesses are notoriously difficult to rescue once they get into difficulties. Businesses with a turnover of £1 million or less achieve a rescue rate of only 27% compared with 56% for businesses with a turnover of more than £5 million.

Knock-on effect

Any business owner who experienced the last recession will recognise today's difficult trading situation. The first thing most businesses do when they run into difficulties is to start delaying payments to their suppliers - and the knock-on effect can quickly spread throughout the business sector. There is, therefore, a greater need than ever to make sure you have effective credit management procedures in place.

Credit management

An effective credit management policy needs pre-sale and after-sale elements. Pre-sale you need to:

• Establish clear credit terms - that you will communicate to your customers, and to which you will adhere strongly
• Take up credit references - don't be so keen to pursue a sale that you neglect to check the prospective customer's credit
• Encourage payment by credit card - credit card payments offer greater security, and remember, these days you can negotiate processing terms with credit card companies
• Agree an invoicing and payment schedule - get the customer to sign a contract or engagement letter setting out the stages at which invoices are to be presented and paid
• Offer discounts for prompt payment - for example, offer a 1% discount for payment within seven days of the invoice. The improvement in cashflow could more than offset the cost

After the sale, you need to:

• Invoice as soon as possible - set up a cut-off date for billing so that invoices go out at least 7 days before the month end - within the current month's payment cycle
• Stick to your collection practices - appoint a permanent credit controller who will implement your policy strictly
• Help your customers to pay promptly - for example, include as much information as possible on the invoice, send out statements twice a month, include a pre-paid envelope, etc.
• Charge penalties for late payment - these should be included in the credit applications and contracts to be enforceable, and should also be printed on the invoice
• Chase bad debtors yourself - rather than paying others, send your credit controller on a course where, for as little as £100, they can learn how to send out official letters and, if necessary, proceed to the Small Claims Court

We can help you set up and manage a credit policy. Please contact us if you would like to discuss this important matter