Managed Credit Control Services the Key to a Healthy Cash Flow?

There was a study relating to personal goals, done by a US university that proved the power of written down goals. If memory serves me well a written down goal or target is 80% more likely to be achieved. This is particularly true in business where the goal may be set by one person to be achieved by another. Writing it down removes areas of grey and helps communicate the task more accurately.
This approach is very important with any business critical function of which Credit Control is one. With this in mind, it is astounding how many companies muddle through Credit Control in crisis management mode with no real strategy or documented process. We have written a very short list of tips that first appeared in the Independent newspaper's Cash Flow Management supplement. I have expanded it slightly here, it is simple, but if you have nothing in place at present it use it as a start point.
Where to Start?
First of all, work out your current performance and compare with your offered terms. The most common measure of the effectiveness of your credit control process is Day Sales Outstanding (DSO) which is an average measure of the number of days it takes for invoices to be settled:
(Total Debt/Annual Turnover) x 365 = DSO in Days (for an annual overview)
Compare this number to terms offered. If your terms are 30 days and you are collecting on average in 45 days then you are doing well. If it is taking nearer 90 days for people to pay then attention is needed.
Also look at the effect of reducing your outstanding debt by 10%, 20% & 30%. If 20% of our outstanding debt is a significant amount of money for your business, then spending time on improving process is worth while.
Define and document your process:
A Credit Control Process needs to have
• An Owner responsible for managing and ensuring the regular performance
• A defined start point, generally derived from the invoice date
• Clear subsequent steps that will be followed until payment is received
• A time bound plan for the course of action where payment is not received after a defined period
• Some measures, as a minimum Day Sales Outstanding should be monitored
• Diarised reviews of the measures and process effectiveness
Chase Method
Voice communication is the mainstay of effective Credit Control. Letter and email are generally only an option for low value invoices and great for follow up and confirmation of what has been said and agreed.
Start early:
Commence chase activity before the payment is due with a pre-emptive service call. If there is an issue it is better to discover and rectify before payment becomes overdue.
Clear escalation
A decision point after which Debt Recovery procedures commences is advisable. Delay can be costly, and in some cases has resulted in a loss that could have been avoided with prompt action.
Keep an eye on your customers
Changing circumstances can often reveal themselves first as a change in payment behavior or a request for extended terms. Automate some monitoring if budgets allow, where manual methods re used schedule a regular review to ensure you are up to date with the health of your customers.
Finally
Ensure that the chase activity is performed as consistently, as with any other a time-bound operation. Credit Control is a critical final step in the sales process, a sale is not really made and closed until you have been paid.
Run your new process for a period of time (3 months) and then review against your measures, making adjustments if needed. An initial 10% improvement in cash flow should be reasonably easy to achieve with focus. If volumes are too much to cope with, ramp up resource with a temp or ask a credit control service provider for support rather than let calling slip. The faster you collect you cash, the lower the risk of you being caught by customer insolvency. Once they are gone, they are gone; generally with most if not all of your money and all of your profit, so a few extra pounds spent on adequate resources should pay back in the long run.