Credit and recessionary times

With the credit crunch and the financial crisis providing the backdrop for recession there are now greater concerns than ever for the economy. Research shows that SMEs are more in debt now than at any time since the late 1990s.

The number of formal insolvencies and customers going out of business is rapidly increasing and, for many business owners, cash flow has become much tighter than ever before. 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 can be 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 both pre-sale and post-sale elements.

Pre-sale you need to:

• Establish clear credit terms – that you will communicate to your customers and to which you will adhere to strongly
• Take up credit references – don’t be so keen to pursue a sale that you neglect to check the prospective customer’s credit
• If possible, encourage payment by credit card as these payments offer greater security
• 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
• Consider offering discounts for prompt payment – for example, offer a small discount for payment within seven days of the invoice as the improvement in cash flow could more than offset the cost

Post-sale you need to:

• Invoice as soon as possible set up a cut-off date for billing so that invoices go out at least seven days before the month end within the current month’s payment cycle
• Stick to your collection practices – appoint a permanent credit controller who will strictly implement your policy
• Help your customers to pay promptly – for example, include as much information as possible on the invoice; send out statements twice a month
• 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. You may consider sending your credit controller on a training course where, for as little as £100, they can learn how to send out official letters and, if necessary, proceed to the County Court

We can help you to set up and manage your credit policy. For more information or assistance contact Diane Hill at dhill@clbcoopers.co.uk or Mark Getliffe at mgetliffe@clbcoopers.co.uk or call 0161 245 1000.

Article extracted from taking: account  newsletter March 2009