Do you really have control of your debtors?

Anybody can sell if he does not expect to get paid. Time and again businesses achieve their sales targets, yet go to the wall, because they have cash flow problems (17,000 companies alone in 2005/06). And it is not just the new and inexperienced businesses either.

One of the secrets of survival is proper control of the sales balances outstanding. Monitoring them starts with a list. It is sad how often that list is produced in ABC order? Every list is an opportunity to rank the contents in some order or other. There are only two arrangements. ABC order is not one of them. Who cares whether the £10,000 outstanding for two months is owed by AA & Sons or ZZ Ltd? The amount and the period overdue are all that count.

Before the chasing – start off on the right foot

But even before the chasing stage there are a number of checks and balances that ought to be incorporated in any good system of credit control. Not all will apply, but how many of them form part of yours?

Firstly the order. It ought to be on your terms, not theirs. Perhaps bear in mind that it is an old trick to return the seller’s order form altered. It almost always works, because it is covertly done. Then just, for example, as you are about to exercise your right to repossess your unpaid-for goods under the properly drafted Retention of Title Clause [is yours properly drafted? (see Indictor Issue No ….)] in your contract, the buyer queries something else and casually draws your attention to his alteration.

Your terms are certain to have included a date for payment. No marks if they stipulate for “payment by…” Many do. What is wrong? Your job as credit controller is frustrating enough. Do not give the late-payer the satisfaction of telling you the cheque is in the post. If you had said “payment is to be received by…” you would be on preciser ground for later if it comes to suing (and also incidentally when calculating interest).

You will, of course, have written for credit references. A well-run department might well have its own credit application form. Do not let your eagerness allow you to overlook the fact that you have not had the form back. Telephone if there is a delay. The reason may be quite innocent, but (as with staff references) many a referee would rather not reply than give a bad reference. Speaking to the referee is a sure way of giving him an opportunity of expressing his doubts.

Having established a credit limit stick to it. In R v Chandler the jury heard how this fraudulent trader started his account innocently and then time and time again worked on his greed to get him to supply more and more (before the time for first payment) – well exceeding his initial modest credit limit. And, of course, no-one got paid. That leads to the next point. Do you even have the information in place to allow you to suspend deliveries if the account is overdue.

Chasing your money – before the going gets rough

A tight system is essential. It should come into operation on the very day payment is due (before it is due if you are waiting for a substantial sum). Most firms write. A telephone call works better – preferably, credit controllers say, from a female. Either way the conversation ought to be meticulously recorded. A form will pay for itself. Who you spoke to, when, what was the reason and what the promise. Then the date for follow-up. Good intentions are not enough. Persistence pays too.

Lastly few people threaten to claim the statutory entitlement to interest on overdue accounts. They reason that it will prejudice the chance of repeat orders. It may. But consider a) telephoning the buyer to see if he knows payments are late. Often the accounts dept has a different agenda and the buyer just does not know the accountant has sneakily re-arranging his bargain for him. In that size of organization it may be that the buyers won’t even know if you are pursing your legal right re interest; and consider b) factoring the interest re late payment into the price you originally quote.

No system is perfect and a credit controller who has never had a bad debt has probably lost his firm a fortune in sales. On the other hand the business with a proper system is a safer place to work in and deserves to prosper.

L M Wise FCA
Barrister-at-Law