Top 5 Credit Management Issues | CMG UK (2024)

7th March 2023| Jenny Esau | CMG UK News, News and Advice

There is no doubt about it, credit management, in particular credit control, can be frustrating at times; this may lie in the fact that many different departments of a business will contribute towards the success of a credit management function, and therefore there is a wide scope of possibilities in identifying underperforming areas in order to make improvements.

Some of the most common credit management issues are relatively easy to overcome; here I detail the top five issues, and how they can be resolved.

Being unable to speak to a customer

Arguably one of the more exasperating aspects of credit management, trying to chase for payment from a customer without being able to get in touch with said customer can take up a tremendous amount of time with little to nothing to show for it. If your customer is simply ignoring your emails, then I would suggest mixing up your chasing activity with phone calls and even letters. Your communications with your customer should be getting firmer in tone as the debt becomes further overdue. If you are still not getting any response, consider what leverage you can employ to get a response, adding interest to the debt, suspending their account, legal action. I recommend businesses have collection strategies for their different customer types with timed actions and the end result being suspension of account and legal action. With your ‘platinum’ customers, the strategy maybe your directors are involved before that action is taken.

When a customer states they don’t have the ability to pay

If your customer states that they are in financial difficulty then ensure you stop work or if you choose continue to work for them, you may want to consider agreeing a payment plan. To reduce your overall debt and risk, I recommend ensure the payment plan is against older, ring fenced debt and all future invoices are paid to terms. Your customer will more than likely want to negotiate, therefore begin with your ideal so you have wiggle room to negotiate down and still be happy with the result. If your customer is not willing to negotiate a payment plan then I strongly suspect that they fall under the ‘won’t pay’ or may be in the process of failing, and therefore chasing should be immediate and firm i.e. sending final demands and starting court action or insolvency proceedings.

Receiving the same dispute time and time again

Late payments are often caused by a customer disputing their invoice; this could be for any number of reasons, both genuine and spurious, but these disputes need to be resolved as quickly as possible to avoid late payments. Recording disputes is an ideal way to identify where the issue originates; for example, if you receive numerous disputes regarding faulty products then the issues lies with your production, if a number of people are stating their invoices are incorrect then your invoicing procedures need to be evaluated. However, if your customer always says they don’t have the invoice, send a copy keep copies of the emails originally sending the invoice to them and (after confirming they have been sent to the correct email addresses) and forward that email to them to prevent your customer redating the due date from the date they received the copy.

Customers entering insolvency

Receiving notice that a customer has entered insolvency can cause issues for your own business, especially if the company in question still have outstanding invoices that they will not be able to pay.

One way to reduce your risk of working with customers that may become insolvent is to perform credit checks at the outset and place them onto monitoring so that you can receive prior warning if their credit risk changes and insolvency appears likely.

If an existing customer has entered insolvency, you should be aware of what you can do, as a creditor, to receive payment of your outstanding invoices; our Insolvency training course thoroughly covers the implications to a credit of insolvency, find out more information here.

Always register proof of debt with the receiver/ administrator to ensure if there is a dividend payable to unsecured creditors in the future, you will receive it.

When your customer tries to change their payment terms

If you are willing to consider changes in payment terms for your customers when requested, there are a few things to consider before accepting or denying their request. You need to assess their payment history with your company, if they have been poor payers in the past then you run the risk of extending how long you wait for payment, as well as assessing the viability of their request, i.e. how it will affect your cash flow.

Also consider the cost impact of extending terms on your business, are you able to extend terms to your suppliers to offset the cashflow impact? What is the funding cost for extending terms and should you agree only if a price increase is also agreed to compensate you for the additional cost?

Don’t forget the cost of extending credit terms to your customers should not only be measured in interest charges for additional borrowing but also in tying up more of your working capital resulting in loss of opportunity, such as not being able to fund growth plans.

I find some of our clients tend to agree if they are getting a lot of work from this customer, the cost to your business is higher.

I recommend any request for an increase in terms is initially denied on the basis that it may result in a cost increase to the customer. If the customer continues to push for extended terms and that customer is important to your business, negotiate to reduce the amount of additional days they want credit terms to be extended.

If you would like to hear about how CMG UK could help you improve your cashflow, please contact us [email protected] or 03332 413 203 or go to our home page here to get more details of our services.