At a time of rising costs and wage inflation, it is crucial businesses take care when it comes to managing their debtors ledger. So, how far should debt managers go when asking customers to pay on time and what should they do if late payment becomes a problem?
Currently, businesses across sectors are undergoing significant financial pressures. There are numerous factors causing costs to creep up, such as; rising energy prices, supply issues and wage inflation, meaning that it may be necessary for decision makers to increase prices for their goods and services. This will hold off financial difficulties by protecting cashflow and enabling working capital to be effectively managed in connection with good credit management.
What are the key obstacles when keeping on top of a debtors ledger?
Afraid of damaging long-term customer relationships
Credit management aims to grant credit and manage credit lines efficiently, in order to optimise the business’ cash position. One of the key obstacles when keeping on top of a debtors ledger is that often, business owners are afraid of damaging long-term customer relationships. Therefore, it is important to strike a balance between allowing customers some flexibility and setting boundaries.
Offering Discount for Prompt Payment
Another technique decision makers should consider is incentivising businesses to be good customers by offering a discount for prompt payment. However, controls must be prepared and care taken to ensure this approach works for the business. For example, decision makers will need to ensure that late payments don’t lead to an automatic reduction and instead of offering repeated discounts, it may be worth considering one-off incentives instead.
Consider the ‘Carrot and stick’ approaches
When thinking about the most effective way to encourage customers to pay on time, it’s helpful to consider the ‘carrot and stick’ approaches. A good example of the ‘carrot’ approach would be a scenario in which the business makes it as effortless as possible for the customer to make a payment on time, for example, making sure that exactly the correct amount has been invoiced, the precise corresponding delivery notes are available, and they correspond to the correct purchase orders raised.
Getting the timing right
Getting the timing right is also an important factor to consider. For example, an invoice is much more likely to slip down the customer’s list of priorities if it arrives at 4pm on a Friday. Keeping the timing consistent each month also helps customers to know where they stand, assisting them with their cashflow planning.
One way a business can manage their credit lines without negatively impacting customer relationships is to separate responsibilities; chasing payments should sit solely with the credit manager, whereas the client manager should focus on strengthening the client relationship.
What approach can you take to keep on top of debts ledger?
Use the ‘Stick’ Approach
Alternatively, examples of the ‘stick’ approach to credit management are last resort measures, such as appointing a debt collector, or petitioning for a company to be wound up. Despite there being a time and a place for this kind of action, it’s worth remembering that these are short-term solutions and are likely to damage valuable customer relationships.
The nature of the human psyche implied that people will means that people will generally try to push boundaries, where possible.
As the customer’s priority is to manage their own cashflow, they may look to exceed their payment terms if possible. As such, it’s crucial to set a precedent by consistently requiring customers to pay on time and using the stick approach to reset boundaries if payments start to slip. Additionally, the business can also set a positive example by making payments to its own suppliers on time and promoting its reputation as a good customer.
Knowing the difference between ‘good’ and ‘bad’ customers
Knowing the difference between good and bad customers is also important for decision makers when making tough decision. From a cashflow perspective, there’s little value in having a profitable customer on the business’ books if they cannot make payments on time. In this instance, the business may be spending large amounts of time and resource chasing payment, which could be utilised better invested in new business activities.
Don’t put all your eggs in one basket!
Companies should also steer clear from putting all their eggs into one basket. Even if a customer is reliable or places a lot of business, cashflow would likely take a hit if they stopped paying. In may cases, a clear sign of a good customer is how open and transparent they are in terms of communicating with their suppliers. Another sign of a good customer is that they are likely to keep the supplier updated when they’re going through financial difficulty, so the business can plan accordingly. For example, communicating that they cannot pay at the 30-day mark, rather than waiting to be chased, enables the business to allow for extra time into its cashflow cycle.
Maintaining a healthy cash flow
In the current climate, business owners must focus on maintaining a healthy cashflow and can’t afford to let customer payments slip. Through careful consideration around the best way to incentivise prompt payments and setting clear boundaries, good credit management doesn’t have to come at the expense of valuable long-term customer relationships.