Credit Control - Your Sales Ledger and Overdue Accounts
Cashflow begins with getting paid on time. If poor credit control means that you are not collecting cash from clients within a reasonable period your overall cashflow will be bad and nothing else you try will be capable of making it good.
Terms and Conditions - Credit / Debit Card Sales
These are your rules when it comes to payment if you are financing credit transactions but if you are selling exclusively by credit/debit card they will be whatever your merchant account provider specifies, so read their small print carefully.
What you should especially look out for is the merchant account provider’s policy regarding security deposits or ‘rollover retentions’, which can hold up final settlement, sometimes for several months. Sales of computer equipment, mobile phones and online travel services are examples where a high percentage of cashflow will be retained like this.
Terms and Conditions - Sales Ledger Credit
If you are supplying goods to the retail or wholesale trade or services such as website design, it is more likely that you will be called upon to finance credit sales yourself through a sales ledger.
This is usually known as ‘open credit’. The sales ledger will detail transactions between you and your clients which are still outstanding for payment.
You will have previously specified your terms and conditions here including how long a period of credit you allow before your invoices are due for payment. This should reflect the norm for your trade. For example foodstuffs and other perishables tend to be sold on relatively short credit periods, while credit terms for non perishable consumer goods will be longer. If in doubt, you should ask the advice of your trade association.
Whatever the credit period you allow, the strength of your sales ledger and therefore your cashflow will largely depend on how effectively you enforce it.
Your Sales Ledger and Cashflow
You will see from your Figurewizard report generator that when it comes to collecting cash you are invited to enter what percentage of a given month’s sales will be paid in the month they are made, what percentage after one month then two months and so on.
This is because in the real world not everybody pays up at the same time and in some cases, especially where bigger players such as supermarkets are concerned, they may well have a policy for settlement which will not be the same as yours.
Whether or not you are prepared to accept such a policy is up to you but you should always be aware of what such business will do to your sales ledger and therefore your cashflow if you decide to get take it on, no matter how profitable it may appear to be.
To do so, you should revisit and edit your Figurewizard report, changing the percentages of cash you expect to receive each month to reflect the impact of the new business on your cashflow; then go to your chart planners and either run 'what if' scenarios or simply view the revised cashflow chart.
As profits from such business build up so will the cashflow from it but for an initial few months it is almost certainly going to suffer. You will need to know by how much and crucially whether or not cashflow will go negative for a while. If it looks like it will, you must act to cover it during that period.
What you must never do is to allow a situation to develop where you run out of cash. Even a single week of cashflow starvation has the potential for disaster.
Managing your Sales Ledger
This largely depends on the system you are running. What it should do is to both provide and act upon the sales ledger information it is storing to deploy the first weapon you have when it comes to late payers – Putting an account on ‘stop’.
There are two criteria that it should use: A sales ledger credit limit that you enter for each individual client which has been exceeded or an overdue account.
Suppose that you have set a sales ledger credit limit of £5,000 for a particular client.
In this case if you are processing an order of value £2,000 and they already owe you £4,000, your system should stop and present you with a choice before processing the order. At this point you can either contact the client and ask for the cash to reduce the amount outstanding, or you can override the system and let the order go through regardless.
Whichever choice you make, the important point is that this feature brings the matter to your attention and keeps you in daily touch with what is happening with your sales ledger.
Alternatively the system will tell you that part of the debt has become an overdue account. While you still have a choice it is not recommended that you override the system in this case and let the order go through. This is the very situation where your cashflow is being put at risk and the bigger the client the bigger that risk.
You are perfectly entitled to demand cash from an overdue account to bring it up to date before you are prepared to resume deliveries. If you fail to do so it will be your cash sitting in their bank account when it should be sitting in yours.
Demanding Payment
Your sales ledger system will produce statements of account at the end of each month. It should also generate letters at times that you specify. There should be three letters spaced out between two week intervals.
The first will be a reminder that the account is overdue using a form of words adding up to - ‘will they please address the matter by return’: This is usually sent out when the account is say two weeks overdue and before the account is due to go ‘on stop’.
The second will be much more strident, pointing out that the account is ‘regrettably on stop’ and that payment within seven days is now required of them.
The third is simple; pay up or we will withdraw credit and issue court proceedings. To learn how to sue through the Small Claims Court yourself, you should read the article on this.
You may decide that it would be better to telephone ahead of issuing the third letter, but if the cash is still not forthcoming then the small claims court will remain your only option.
Pro Forma - Cash before Delivery
If you get to the stage of having to issue a third letter then you should consider withdrawing credit and demand that future orders be paid for ahead of delivery; this is known as pro forma dealing. Certainly your number three letters should make the point that this is a possibility.
Many companies will shy away from this where large clients are concerned but it is a fact that these are the very clients who can do the greatest damage if payments are severely delayed.
With all clients, including the bigger ones you should look out for a growing pattern of delays in settlement. This is often a sign of problems. Worse still is a situation in which you are presented with an ultimatum demanding extended credit 'or else'.
It will be highly likely that this client is facing financial difficulties and is seeking to resolve their own lack of cash by using yours. They will represent a clear and present danger to your business and you should take immediate action to recover all of the monies owed to you in the first instance and then either refuse to do business other by pro forma in the future or agree to continue to trade subject to a strict and affordable credit limit.
Always remember that profits and cash are not the same thing. The archives of the Official Receiver are littered with cases of profitable businesses whose poor credit control caused them to run out of cash at the wrong time.
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