What is credit control?
Credit control is the system used by a business to make sure that customers are only given credit if they are able to pay (and that they pay on time). Usually, this would mean that you are allowing people or companies to pay for your goods or services some time after they have been delivered (unlike in a shop, for example, where they would have to pay for what they want before they leave). Commonly, when a business gives credit, they allow 30 days for payment. This means your client has 30 days from the time you issue your invoice to pay you. Some bigger clients might require a longer period, and 60 days isn’t unheard of – especially in the service industry. Credit control is the action of following up on this credit and ensuring that customers pay when they should.
Credit control is a very important part of running a business – if you don’t do this effectively, you will potentially have cash flow issues when accounts haven’t been cleared. To ensure you don’t run into issues as a result of offering credit, you should keep credit to a minimum. Don’t give it if you don’t need to, there’s nothing wrong with payment on delivery, or even a percentage up front and the balance on delivery arrangement. Sometimes, you’ll have to give credit as part of getting the contract or business; in fact in some industries there are norms in this area that you simply won’t be able to do anything about. So use your judgement, but make sure you have considered the effect on your cash flow and potential problems that could be caused by each credit arrangement.
Credit control and Xero
If you use Xero, you can set reminders that will help you keep on top of things. Set up auto reminders to prompt people when their invoice is due (it’s a new Xero feature this year). You can set them to come at certain times, and even word them in different ways, etc. You can also record notes in Xero on what happened with each follow up attempt and what promises are being made.
Chaser add-on with Xero
Chaser is a Xero add-on that takes this a step further. It creates auto reminders that are personalised from the business. You can create different levels of reminders from different people in the company – it’s a more personal approach (despite being automated) and therefore has more impact, which results in a greater response rate. Chaser works on a monthly subscription basis, with a number of pricing levels ranging from £10 for chasing up to 20 invoices per month to £125 for chasing 1,000 invoices per month
What happens if the client won’t pay?
Sometimes, a client just won’t pay an invoice, no matter how many reminders are sent or phone calls made. We recommend you have a system in place for passing such invoice on to legal follow-up. And if this happens, make sure you don’t do any more business with the company until the issue is resolved. Having a system of legal follow-up is usually very effective. It starts with a letter, which can cost as little as €50 – many businesses who aren’t paying for whatever reason will pay as soon as they get such a letter, as it shows you’re serious.
We have started working with Tracey Solicitors, who have a dedicated service offering in this area. They have a specialist debt recovery department and 20 years’ experience getting results for their clients – dealing with everything from specific debt issues to the broader management of full debtor ledgers. They can represent clients at District, Circuit and High Court level and have a case management system that keeps clients fully informed of the debt recovery process. If you have to go to court, you may incur significant fees. However, these can be passed to the client as part of the judgement, so deciding whether or not to take action is a case of weighing the size of the debt against how likely it is you will get the money.
Ensuring your business has good cash flow is all about effective credit control. Your debtors can be measured in terms of the number of days it takes them to pay their debts. The overall amounts you are owed is called your debtor book and the term debtor days is used to mean the average number of days it takes for you to receive payment from your customers for invoices issued to them. You calculate this by dividing your annual sales by your average receivables, for example:
€5,000 trade receivables / €30,000 annual sales x 365 = 60.83 debtor days
In an ideal world, this would be under 30 days, but it could be as much as 60 days which – if you’re prepared for it – isn’t the end of the world. However, if you are looking at debtor days of anything like 120, this represents a significant amount of cash that your business doesn’t have access to and cannot benefit from.