Business Credit Management UK

PROTECTING THE DEBTOR ASSET - A POLICY
By John Arnold MICM


Usually the largest single asset of a company is its debtors or sometimes referred to as accounts receivables.

I hope the following will be a useful guide on how to look after this most valuable asset which if not managed properly will cause the downfall of any company. Even profitable companies can go 'bust' because they have not managed to control their cash flow and in particular their debtors. Remember and act on these three favourite phrases and you will not go far wrong.

CASH IS KING.

A SALE IS NOT COMPLETED UNTIL IT IS PAID FOR.

THE ART OF GOOD CREDIT MANAGEMENT IS KNOWING YOUR CUSTOMER.

WHY PROTECT THE DEBTOR ASSET?

Failure to do this will inevitably cause the collapse of any company. The debtor asset is the lifeblood of every company and without proper credit management procedures being managed by qualified credit personnel it will surely die.

Good credit management will increase profitability by improving cash flow, reduce the working capital requirement, reduce bad and doubtful debts thus ensuring funds can be reinvested in the business. It enables the optimisation of sales on a controlled risk basis.

HOW DO YOU PROTECT THE DEBTOR ASSET?

Credit is controlled by three basic elements which are:

  1. Credit limits
  2. Terms
  3. Sound debt collection routines

LET US START WITH TERMS

It is vital to every business that before they do business they inform their customer the service/goods are being supplied are on their terms NOT the customers. You must protect yourself from being forced into accepting your client's terms. If you have to accept the clients terms then you must be sure you are both in agreement and most importantly you have worked out the cash-flow effect on your own business. A very large order/contract and profitable one could still very well be the downfall of your company if you have not worked out the cash implications on your working capital.

I fail to see how any company cannot work to/with credit limits. You maybe prepared to lend the writer of this article £5.00 pounds but would you lend him say £50,000 on unsecured terms? I doubt it. So why would you do that with your company's cash and risk any profit on the order/contract.

SO HOW DO YOU KNOW WHEN TO GIVE CREDIT AND APPLY A LIMIT?

Before you start you must have an effective credit account application form which ideally is completed by your prospective customer. Often this is not practical because putting the credit limit in place is left to the last minute. On a Friday afternoon at 4.30 many credit control departments are 'very stressed out places'. Thus it is usually an operations/sales person that completes the form.

This point in the sale transaction is almost certainly the most important stage.

Some important questions to ask:

  1. Who is your customer? (This sounds unbelievable BUT more often than not people DO NOT know who they are dealing with). Experienced credit controllers will ask at this point "Who to sue"?
  2. What are the terms?
  3. The sale details i.e. what is the expected sales turnover on a monthly basis.
  4. Details of some current suppliers.

Armed with the answers to the basic questions above and the completed account application form you can now start on the process of "when to give credit and apply a limit".

  • d) Apply a credit limit which must be compatible with the anticipated turnover. A credit limit for monthly trading must equal three times the turnover if the account is paid within sixty days. If these conflict then there must be procedures in place to refer the account for a 'commercial decision' at Board/Director level. This would also apply to existing accounts where the level of business exceeds authorised credit limits. It is essential the Board/Directors receive the recommendation of the Credit Manager/Credit Controller in the due process of establishing a 'High risk credit limit'.

    NB There are many different sources of information. The purpose of this paper is not to give a conclusive list of sources.

    GOOD DEBT COLLECTION PROCEDURES ARE A MUST.

    Churning out periodic letters and sending them to your customers will not produce the cash.

    Good debt collection management results in a mix of the following:

    1. Monthly statements.
    2. Letters.
    3. Telephone calls (this is most important).
    4. By using a good diary system.
    5. By applying stop lists
    6. By the use of 'local operational' management in difficult cases.
    7. By the use of third party collection.
    8. By the use of the Courts.

    SO HOW DO YOU KEEP YOUR CUSTOMERS TO TERMS?

    CREDIT INSURANCE

    One way of protecting your debtor asset is to purchase a credit insurance policy to protect you against bad debts.

    Credit Insurance comes in all 'shapes and sizes' and is too complex to go into detail in this paper but needless to say the Credit Insurer expect you to protect them against claims by you protecting the debtor asset. You must seen to be trying to mitigate their losses.

    INVOICE FACTORING

    This another way of protecting your debtor asset but this means handing over the debtor asset i.e. your invoices to a specialist who in turn will pay you a percentage of your invoices in cash. The buyer of your invoices then proceeds to collect the cash from your clients.

    This is in fact recognised as a very expensive means of financing your business.

    WHAT DO YOU DO TO PROTECT THE DEBTOR ASSET?

    1. You must have a proper credit management system described above.
    2. You must have qualified personnel looking after your asset.
    3. Your computer systems must do what the credit control department needs not what the computer department says it must have.
    4. You must support the credit control department.
    5. You must recognise that the credit control department is an extension of the sales function.
    6. You must have a sound credit management policy which everybody accepts and obeys.

    WHEN DO YOU PROTECT THE DEBTOR ASSET?

    All the time!

    1. When do you apply a credit limit? Answer - before accepting the first order.
    2. When do you agree terms? Answer - before accepting the first order.
    3. When do you chase your customer for non-payment of invoices? Answer- as soon as they become overdue.

    All successful businesses spend a lot of time and money on protecting the debtor asset - DO YOU? It could actually save you money in the long run and even save you your business.

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