Credit management: Staying on good terms

Declan Flood, aka The Credit Coach, continues his series on more effective credit management. In this article, he emphasises the importance of credit terms and their vital role in providing a foundation for sound credit management.

When people think of credit control, the first thing they think about is collecting the money that is owed. While that, of course, is the endgame, there are a number of stages you should go through first before you can excel at collections.

If you have been reading these articles you will know that the first step in credit is assessment, making sure the person or business that you are trusting with credit is, in fact, creditworthy. Taking chances can be expensive.

The next stage, may seem at first to be far too basic. However, it is a step that is often overlooked and misunderstood — it is your credit terms.

WHAT ARE YOUR CREDIT TERMS?

All too often when I ask what a merchant’s credit terms are, I get answers like 30 days or 60 days. While it might sound like an answer, what does it really mean? Take the answer of 30 days — is
it 30 days from date of order, date of dispatch, date of invoice, date of receipt of invoice or end of month following invoice? Vaguely defined credit terms are simply not good enough. They lead to
confusion and arguments, and the last thing you want to do is fight with your customers; when you do, there can only be one loser. Just to check if I am talking rubbish here, have a look at your New Account Application Form – when it comes to payment, what does it say? Then, look at your Invoice – what payment instructions are printed on it? Next, look at your Statements – what is the payment due date? What about all the small print in your Terms & Conditions, what does it say? Finally, take a look at any quotations you send out — what are the payment terms on those?

KEY FACTORS TO CONSIDER

There are two key factors to note here. Firstly, is something included on each of the above documents? If not, you are sending out the message that getting paid isn’t important to you. You need to amend your paperwork straightaway, so everyone is clear.

Secondly, if you have something printed on each of the documents above — is it consistent? I have seen ‘30 days from date of invoice’ printed on invoices while at the same time ‘30 days from end of month’ is indicated in the Terms & Conditions. I have heard credit controllers say their terms are 30 days but nobody takes them seriously or their terms are 30 days but the customers take 60 days. With omissions and inconsistencies like these, is it any wonder? In short, your credit terms should set out clearly and exactly when you expect to be paid by your customer.

GIVING CREDIT TO SELL MORE

I suggest you consider this: you should only give credit when you think it will help you to sell more. If you are going to make the sale anyway, what is the point in going to the trouble and expense of giving credit at all?

If you must give credit, then 30 days from date of invoice might work for large one-off orders to reputable companies. This means that if the invoice is dated 15th October, payment is due on 14th November.

If you are operating a monthly account, then consider something like ‘Payment is due on the 28th day of the month following invoice’. That means that all goods purchased in October should be paid for on the 28th November. If your terms are ‘28th day of the month following invoice’ and there are customers that consistently take an extra month, then a clear decision has to be taken by asking yourself if you are happy with this? If you are, then change those customers’ terms to ‘28th day of the second month’ and get on with it.

To make this work for you, you have to have a clear payment date for every single order leaving your shop, and then those terms have to be enforced consistently by everyone, including sales and counter staff, the boss, the boardroom and the office.

We will deal with the collection cycle in a later edition. We have one more step to go through before we get there so I look forward to sharing that with you in the next issue.

Declan Flood: “In short, your credit terms should set out clearly and exactly when you expect to be paid by your customer.”

This Business Support article featured in the January/February 2016 edition of The Hardware Journal.