Setting Up a Credit Control System

Mismanagement of cash flow is the single biggest reason that small businesses go under. Therefore, a good credit control system is an essential part of any business' accounting procedures. Maintaining consistent cash flow, avoiding bad debt and minimising late payments are essential for survival. Use the following checklist to set up a system.

Things to do

1. Set up a detailed credit control system

It must allow you to identify

·         Invoices that have been raised,

·         sent to customers

·         Paid

·         Need chasing

·         Train several people on the system and test it thoroughly.

2. Credit-check your customers

To do this, you can approach their bank for a reference; use a credit reference agency; or ask their other suppliers. Establish how solvent the customer is and whether they are likely to have any problems paying their invoices on time.

3. Decide on your general payment terms

Most importantly, decide on a payment date. Bear in mind that new customers should only be given a short time in which to pay. Go through the terms with each customer.

4. Send invoices promptly

Try to send all of them out the same day as goods are sent or delivered or service provided. Make sure the invoice is sent to the correctly named and titled person, at the right address.

5. Start an automatic reminder procedure

Flag invoices that are due; Phone, to chase up payment.

6. Appoint a 'debts person'

This should be a trusted employee in charge of following up bad debts. They should keep a record of all calls and letters sent. Remember you can charge interest under the Late Payment of Commercial Debts legislation.

7.  Have a stop list for late-paying customers

Circulate this list to all appropriate employees to prevent further credit or goods being supplied. Inform the late payer that they are on the list.

8. Organise a sufficient overdraft

You should have enough overdraft to cover the worst possible periods of cash flow.

Best practice

• Educate yourself/your staff with credit control training.
• Employ the services of a credit management consultant at least once every year to see if there are improvements you can make.
• Keep talking to debtors. Don't lose your temper with them, but make it clear you are prepared to take debt recovery action if they do not settle the invoice.