In the current business environment caused by the coronavirus (COVID-19), it’s crucial for businesses to protect cash flow. Whilst many companies are taking positive steps, others are intentionally ‘washing their hands’ of their payment obligations and delaying or cancelling payments to strengthen their own finances.
Whilst there are many businesses feeling the strain due to the virus, particularly in sectors directly affected, there are also businesses owing debts that were due well before the coronavirus appeared that are using it as an excuse to withhold payment. This can have a huge knock-on effect, putting other businesses in jeopardy.
In the current environment it’s even more important to have effective credit control procedures in place, and review the company credit policy to cater for the increased risk. Sterling Outsourcing can help if you need support in credit control, or commission only debt collection, or there are measures you can take internally to protect cash flow:
Check and notify of changes
Have your clients made changes that mean invoices need to be sent to an alternative email address, if their accounts payable staff (AP) are working from home how can they be contacted, is there a new process for obtaining purchase order (PO) numbers? Contact your clients to find out.
You should also make your clients aware of changes you may have to put in place due to home working, for example for them to report a query or to make a credit card payment.
Continue chasing invoices
A common reaction from a business is to stop chasing payment due to concerns about upsetting and losing clients.
It is essential for the company to maintain regular and consistent communication with customers to ensure invoices are paid in a reasonable timescale to protect cash flow. Chasing payment should ensure that your invoice is ‘on the top of the pile’ for payment, rather than relegated behind other suppliers who may be more proactive in chasing.
The credit control team should be chasing invoices prior to due date to ensure that any queries are resolved early and to secure payment close to terms.
Whilst you can adapt your approach to customers in certain sectors who are directly affected by the virus, and you may wish to give additional leeway to them, it is important to set expectations and remind them of their obligation to pay. You may wish to agree a payment plan or extended terms if there is reason to believe the customer’s financial position will improve. Any agreement should be formalised by email so that commitments are met.
Do not be overly concerned about damaging relationships. Leaving the call till later will only delay and most likely increase the conflict.
Effective communication from credit control can also gleam useful information about a customer’s credit worthiness for future business. This can either give the business the confidence to fulfil further orders, or be an early warning sign to put the customer on stop and to save you from future bad debt.
As levels of risk change rapidly, particularly in certain sectors, it’s important to review credit limits and react quickly to signs that a customer may have financial problems.
All customers should be monitored using a credit rating service which will prompt you if a County Court Judgment (CCJ) or winding up petition appears. However, signals will usually be picked up prior to this by your credit controller. This may be changes in payment behaviour or more subtle signs such as differences in attitude or communication.
Customers viewed as a potential risk and those in high-risk sectors should be monitored on a watch list, and you may wish to insist on payment up front or 50% deposits.
If a high-risk customer demands credit or increased terms then do not be afraid to turn the business away. It’s important to consider the total cost of a bad debt v profit margin when making this decision i.e. how much additional business would you need to do elsewhere just to cover the total cost of the bad debt?
Review your query resolution/credit raising/purchase order/cash allocation processes
Delays in payment are often not the fault of the customer, rather they can be due to delays in your internal business process. Staff may not understand the urgency of resolving a query, raising an invoice, or obtaining a PO and how this can delay payment of an invoice. If your staff have moved to home working then you should ensure that procedures are in place for these processes to continue efficiently. Strong communication between credit control, sales and service is key to resolving internal barriers to payment.
Regular ledger reviews
You should conduct regular ledger reviews to ensure that all relevant actions are being taken:
- Identify problem and high-risk clients/sectors and agree changes to credit terms.
- Ensure your credit control team are covering the whole ledger sufficiently and prioritising their time well (focus on largest, oldest debt). If not they may need to change their working practices or you may need additional support from a specialist such as Sterling Credit Management.
- Discuss any internal procedures which may be holding up payment (e.g. delays in getting PO’s or resolving queries.)
- Agree specific actions to collect ageing debt such as communication between higher-level contacts at your business and the debtor, or escalating to a 3rd party debt collection agency.
Your credit control team should have a structured escalation path for chasing invoices including referring the debt to a 3rd party once past final demand stage, or sooner if it has become obvious the debtor does not intend to pay.
Taking legal action can be a slow, costly process at any time, and due to the coronavirus there is now a very significant delay in the courts. Using an agency such as Sterling Debt Recovery, working on a commission only basis, will achieve results more quickly and more cost effectively. In addition, if the debt collection process is unsuccessful, information gathered in the process can either assist in legal action or confirm that action would not be profitable, saving the business from throwing good money after bad.