Date 17 March 2010
Cash is king – more so now than ever and our experience shows that a great many businesses of all sizes are clearly chasing their debts harder and faster than ever before. Effective credit control is however, a skill. It makes good commercial sense to ensure that it is approached in a structured and effective manner as this vastly improves recoveries and minimises the ever present risk of a receivable becoming a bad debt.
Chasing debts can be difficult, especially when there are valuable commercial relationships to consider, for example the last thing you want to do is alienate your largest client over a relatively small bill. However, the following points, which come from many years experience of helping companies recover and manage their debts, may help:
Who deals with credit control?
Chasing debts is not a role all staff relish and many feel uncomfortable doing it. Make sure that whoever is pursing your overdue invoices is up to the job and does so in a polite but firm and fair manner. There is nothing worse than a weak or rude chasing call and many debtors will simply ignore these.
Scripts can help and they ensure that you are giving out a controlled, consistent message.
It can be more effective for one person to undertake this role (perhaps on one or two dedicated days a week in a small company) rather than for several people to try to do it piecemeal as and when they can.
Consider allocating key accounts to more senior staff.
When do they do it?
Check your terms of business or the relevant contract you are invoicing under, ensure that payment dates are properly diarised and that whatever step you take, be that a call or letter, is actioned as soon as possible after an unpaid bill goes past its due date. If your accounting software has a payment reminder facility, use it.
How do they do it?
Ensure that staff keep proper notes of all calls. These can be very useful if you subsequently have to issue proceedings because judges often find contemporaneous notes compelling evidence.
Make sure all promised payments are diarised and followed up quickly if they are missed. If you are told money has been sent, ask for a copy of the payment instruction to the bank or a copy of the cheque. Either can quickly be scanned and emailed to you.
Keep your debtor book under close review and identify the “can’t pays” from the “won’t pays”. Concentrate on the latter and get VAT bad debt relief on the former where possible to help your cash flow – it may not be much, but every little helps.
Have a plan
Develop a cradle to grave credit control plan/procedure which sets out the steps for vetting clients, opening credit accounts (see below) as well as how invoices are managed from issue to payment and STICK TO IT!
The plan should make clear when proceedings will be commenced and by whom but should also include safeguards to prevent claims being issued inadvertently, for example against a key client or where a payment plan has been agreed. If you are going to use a solicitor’s debt recovery scheme such as our own, work with the lawyers to establish a procedure which works for you both and enables formal letters of claim and proceedings to be issued quickly and efficiently.
Publicise the plan/policy internally so that everyone knows how it works and what is expected of them at the various stages of the credit cycle.
Encourage departments to work together with credit controllers so that those chasing bills can deal with the inevitable questions debtors will raise.
Do not accept excuses for non payment at face value
If your client is asking for time to pay, it is asking you to finance its business at your expense. It is not unreasonable to expect a proper, substantiated explanation, preferably from a director and to have this in writing. They will have to provide this to answer any formal letter of claim sent as a precursor to court proceedings and having to go through this exercise early often helps to focus minds and identify weak positions.
Set short deadlines
If your client is in financial trouble delaying recovery action may jeopardise your chances of recovering anything at all.
Keep your word
If you make a threat, for example, to instruct solicitors to commence recovery action - do it. If a debtor doubts your resolve your threats lose their impact. Your demands for payment are probably not the only ones being received and traditionally those that shout the loudest get paid first. As above, diarise deadlines and keep the pressure on.
Consider reasonable instalments
Something is better than nothing but timetables must be adhered to and any default acted on promptly.
Any agreement to accept instalments should be recorded in writing and make it clear that instalments are being accepted without prejudice to your right to sue for any balance outstanding if any payment is not received on its due date or if any cheque is not met on first presentation.
Interest
Even if your terms of business do not contain an interest clause, you may well be able to rely on the Late Payment of Commercial Debt (Interest) Act 1998 and claim interest at 8% over the Bank of England’s base rate without having to commence court proceedings together with statutory compensation of up to £100.
If your terms of business do not allow you to recover interest amend them accordingly and ensure that the new terms are sent to all existing customers with a letter highlighting the change and confirm that they will apply to all future orders.
Interest and contractual caps on damages
Many contracts contain pre-set limits on a party’s financial liability in the event of a breach. The recent decision in Markerstudy Insurance Company Limited & Others v Endsleigh Insurance Services Limited [2010] EWCH 281 (Comm) makes it clear that sums paid by a defaulting party by way of interest on late payments counts toward the amount of any contractual cap on its total liability under the contract. As a result, where you use agreements which contain such caps, you should consider amending the cap so that it expressly excludes interest payments to prevent you being forced to reduce any future claim for damages for breach of contract you might have to bring by the value of the interest you have charged.
Discounts
Can you afford to introduce an early settlement discount? Customers like these but the discount must reflect the saving to you of not having to fund the value of the invoice to a later payment date to be cost effective.
Can you recover your goods?
Consider enforcing any retention of title provisions you may have the benefit of. This often requires prompt action so do not put this decision off – you may be too late to get back what is rightfully yours. In any event, the threat of repossession is a potent one to use in appropriate cases.
If your terms of business do not contain retention of title provisions, consider amending them. We can advise on the necessary wording and procedures.
Can any security be offered?
This can improve your position greatly. However, as care needs to be taken to ensure that any security is valid and can be enforced legal advice should be taken before you agree to any proposal.
Review your file
Have you kept your end of the bargain?
Outstanding matters on your part will almost certainly be raised as a defence to any claim you make for your money. If in doubt take advice before you withhold performance of any your obligations as, for example, stopping work on a job could place you in breach of contract and allow your debtor to gain a significant but avoidable strategic advantage.
Outsourcing
Consider outsourcing.
Credit control can be outsourced to specialist service providers, some of whom operate on a “no collection no fee, no fee basis”. This can be a cost effective option where it frees up staff who can undertake more profitable work instead of dealing with debt recovery.
Finally, prevention is better than cure. As well as reviewing your credit control measures, consider for taking on new clients:
- How do you vet them?
- Do you take references?
- Do you obtain credit reports?
- If you do allow credit, do you set (and enforce) a credit limit
- What steps do you take to ensure that your standard terms of business are incorporated and/or your customer’s terms are excluded?
- Do you always ensure your terms of business are signed?
If you would like more information or advice relating to a specific matter, please contact Simon Walsh on 01727 798085 or by email at simon.walsh@salaw.com.
© SA LAW 2010
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.