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“Cashflow is the life blood of every business great or small”

Credit Control

Efficient credit controlling begins with an invoicing system that is designed to ensure payments are pre-sanctioned and received on time. This is achieved by re-designing a company’s invoicing procedure.

Invoicing

Invoices can be pre-arranged at a fixed fee for an agreed period or rendered on a variable basis.

  • Fixed fee invoices are usually based on an annual contract whereby a fixed amount is payable periodically for services rendered. For example, a monthly retainer or minimum quantity of a supply of goods at an agreed price. Such invoices should be pre- sanctioned and paid on a fixed date each month.
  • Variable charges arise when the invoice raised relates to the exact services or products supplied in that month and includes one off costs.
Invoicing - JTE Consultancy
Credit Control - JTE Consultancy

Example: 1

A PR agency often agrees a fixed retainer for each year divided by 12 monthly payments. The work is then allocated to one or more employees.
Once the retainer has been agreed who monitors the actual cost to the company, for providing the service to the client? What if the client wishes to release a new record or launch a new movie? Will the associated additional PR be included in the retainer or does this become a variable cost?
It is highly unlikely that the employee who has been allocated the work will consider whether the additional workload is correctly paid for by the retainer.
This employee will not be completing a time sheet, so what the company originally perceived to be a profitable contract could become a loss maker without the company realising it until it is too late.

Example 2

Many law firms will agree monthly retainers with their client. This may be to cover general legal advice available to employees of the client company or it may be for a specific job eg conveyancing.

What if the client suddenly gets embroiled in a litigation matter, will this be covered by the retainer?
Most law firms ask their fee earners to complete time sheets either in 6 minute or 15 minute allocations, this means that if a high volume of work is carried out for a client, the financial controller who analyses the time sheets will quickly be alerted to the fact that the work being carried out by the fee earner is far exceeding the agreed retainer and steps can be taken immediately before it impacts on the firms cashflow.

The two examples above highlight how working methods impact on cashflow and the importance of having very tight monitoring techniques and systems in place to get the best profitability from your employees.

Payment of invoices

How do you determine your credit terms?
Do you just use industry standards or have you considered what is most beneficial for the company.

How long should you give your customers to pay your invoices?
Many corporations provide large organisations or their best customers with longer payment terms but how does this impact on the company?

The answer to these questions alone can determine whether your business is profitable or loss making.

Payment of invoices - JTE Consultancy

Credit control considerations

Many businesses think that once the invoice has been sent to the customer it will be paid at some stage in the future and they have no real system in place to monitor payment of those invoices.

There are other businesses that do employ a credit controller but this employee is often an administrative assistant with no accountancy or legal experience, who has no real knowledge of how to set up a credit control department and does not like ringing companies and asking for payment.

Credit control is a job that can easily be outsourced but how should a company select an outsourcing provider? Does the outsourcer have the relevant experience, and can they advise on the whole credit control system or just chase outstanding invoices?
Are they based in the UK or some far flung place like the Philippines or India?
Will the outsourcer work under your company name?

JTE can manage the whole of your credit control system including debt collection, under the banner of your company name in a reliable and experienced way.

 Debt Collection - JTE Consultancy

Debt Collection

When does an invoice become a debt?

Many businesses will wait until their accountant does their year-end accounts and the accountant will notify them that all their unpaid invoices are now a debt on the company’s balance sheet.
These invoices could be up to 11 months old and there could be a variety of reasons why they have not been paid: -

  • The amount of the invoice was incorrectly calculated
  • The Vat applied on the invoice is incorrect
  • The invoice has been incorrectly rendered for supplies/services that were not made
  • The invoice is disputed because the supplies/services were defective in some way
  • Your customer’s accounts department know that your credit control is very relaxed, so your invoice is left to the bottom of the pile.
  • Your customer’s accounts department know that your credit control is not very good, so they don’t pay your invoices in order to improve their own company’s cashflow.
  • Your customer is struggling financially and is not in fact in a position to pay for your supplies/services but whilst they can continue to stockpile your invoices they are still getting the services/supplies even though they know they will never be able to pay for them.
  • Your customer has gone out of business and your invoice is never going to get paid.

How many of the above scenarios could be controlled if you had a good financial controller?

You cannot control your customers finances, but you can properly monitor your own finances and have systems in place to identify early on if there is a problem with the invoice or if your customer is no longer in a position to pay your invoices.
A mistake many businesses make is to continue to supply a non-paying customer because it is keeping their own employees busy.

Poor credit control can have an extremely negative impact on cashflow with dire consequences

If the debt is not disputed and your customer just refuses to pay, how can you quickly achieve payment? Legal proceedings can be very expensive and if your customer is much bigger than your own business you may feel very intimated about demanding payment.

Carrilion Plc’s collapse is a lesson to everyone
This huge company was responsible for the demise of many smaller business, who continued to work on the basis that the PLC was too big to fail.
No customer is too big not to chase for payment. All invoices should be paid in a timely fashion and yet it is many of the largest companies and government contracts that are the slowest payers.

At JTE we are aware of this and have the procedures and techniques to help your business deal with this type of customer including instigating legal techniques which are quick simple and cost effective.