How to optimise profit through effective credit management

As part of our Ask The Expert series, fellow of the Chartered Institute of Credit Management, Steve Savva looks at the effects of optimising profit through effective credit management.


How to optimise profit through effective credit management

It takes an average of 72 days to settle an invoice owed to SME’s in the UK.

Financing a single £1,000 debt at 8% per annum* for 72 days would cost almost £16; that’s before you even begin to take into consideration bad debts or administration costs.

Yet many companies simply do not bother to train the people who are instrumental in getting cash in.  Targets, incentives, rewards and training should be as welcome in Credit as they are in Sales!

Collecting money is an important part of the overall business.  Timely collections ensure good cash flow, minimise the need for bank borrowing, lessen the possibility of crippling bad debts and maximise profits.

What should you consider?

  • Your terms of sale are there to be enforced.
  • The policy you set will determine the effect needed.
  • Credit-check your customers regularly.
  • You should never be embarrassed to ask for your money.
  • If you promise to do something, do it!
  • Efficient, effective systems and communication channels at the time of sale ensure fewer problems at the back end.
  • A dedicated collections person ensures better use of knowledge, quicker reaction to adverse signs and continuity for customers.

Why might you have credit risk concerns?

  • You may assess a risk incorrectly.
  • You fail to notice warning signs of a customer’s decline.
  • Because companies can be crippled by outside events; the collapse of a major company in a market sector can cause many smaller businesses in the same industry to fail.
  • Management doesn’t plan for impending business downturn or interest rate increases.
  • Cash flow suffers before you figure out what’s wrong.

What should you do?

  • Follow up on all overdue accounts. Be persistent.
  • Find out what the real problem is, how it will be resolved, when you can expect payment and so on.
  • Maintain goodwill, empathise, but don’t get sympathetic to their problems.
  • Collecting money is a selling job, so talk about the benefits of paying rather than the consequences of non-payment.
  • Watch the big ones. Don’t think because someone spends thousands of pounds with you that they cannot become a problem.
  • Ask for the money. All too often one has heard conversations about the weather, business levels, held orders, but never a request for payment.
  • Set the tone. A little friendly conversation puts them at ease and preserves goodwill, but get to the point.
  • Leave yourself an escape route. If you lose your temper you lose control.  Stay courteous, but in command.  Be assertive not aggressive.
  • Provide Customer Satisfaction at a Profit and collect the money.

About Steve Savva (FCICM)

stevesavvaSteve has been involved in credit management since leaving school and was a founding Board Member of the Association of Credit Professionals, who he served as Chairman and President.  He is a Fellow of the Chartered Institute of Credit Management, where he served as Chairman of the East Midlands Branch.

Steve has been developing and presenting training courses for a number of years with his own company, Credit Management Training Ltd


Your exclusive offer

Get 40% off the cost a CMT training course by using the voucher code ccp-mcc-197 on checkout. Courses include Best Practice in Cash Collection by Phone and Managing Commercial Credit Risk.  Book now at a venue near you.


average cost of Bank Borrowing for businesses, including hidden costs for loans, overdrafts and charges etc.

Do your retail clients make you wait for your payments?

Tesco are currently classed as the worst for late payment in a list of the UK’s best-known retailers, taking an average of 105 days beyond terms to pay its suppliers, according to our latest analysis.

Our data analysis also reveals that the average time taken to pay a supplier amongst the list of 20 retailers was 45 days beyond terms. Previous research shows that the average overdue invoice to a small business was worth £6,142, small business suppliers to some UK retailers could be waiting prohibitively long to receive late payments on a considerable amount of money.

martinMartin Campbell, managing director of Ormsby Street know that, whether it’s a small greetings card designer or a food manufacturer of some sort, winning a contract to supply a national retailer can be a landmark moment for a small business, particularly in the lucrative Christmas shopping season, but just because a retailer is a household name, it’s no guarantee they are going to pay on time.

He says, ‘Because Christmas is such a major part of the shopping calendar, any orders may be much larger than at other times of the year. This means that a small business could be waiting for even more money during the festive period. If they have had to take on extra staff or resources to meet the order to a major retailer, this could be a potentially difficult and damaging time for their cash-flow.’

The best retailer in the list when it comes to paying suppliers, is high-end department store, Fortnum & Mason, which takes an average of just five days beyond terms to pay its suppliers. In second place was Lidl, which takes an average of nine days beyond terms, followed by House of Fraser and John Lewis, who pay on average after 15 and 18 days beyond terms respectively.

Campbell adds, ‘Negotiating with a major retailer on things like payment upfront can be tough – retailers are all aware that for a small business it’s a big deal to get their products in front of a national audience and so they usually hold the trump card.

‘But that’s not to say that small businesses should just accept the situation. If the retailer values the product and wants it in their store, there should always be a little leeway for negotiating better payment terms.’

The analysis showed that amongst 20 of the UK’s leading retailers, seven of those took on average more than 60 days beyond terms to pay their suppliers, a period of time that is hard to justify.

Campbell concludes, ‘For a small manufacturer or supplier, winning a national retail contract can feel a little like Christmas has come early.

‘Yet if it means they have to wait more than two months to receive payment, it is a big decision as to how any shortfall in cash-flow can be bridged, if indeed it can. The answer lies in small businesses protecting themselves against late payments by learning more about the financial health of their customers, negotiating more favourable payment terms and then chasing hard for late payments.’

christmas-tree-3

Notes: The data used in the analysis was provided by Experian, the global credit reference agency, and looks at the credit rating and payment performance looking at 20 of the UK’s leading retailers. This data is available to users of their services.

The payment performance information generated is gathered from a network of six thousand suppliers over a period of three months (up to and including 31 October). Experian provides further information on payment performance data on its FAQ pages.

Can you nudge your customers towards paying you sooner?

Who wouldn’t want to make their customers pay their bills on time?  As business owners we’re always aware of our cash flow situation.  We’ll know who owes us money and when they’re due to pay us.  We’ll also likely know who might pay us late because they ALWAYS pay us late.

Wouldn’t you like to try and make them pay on time?

HMRC have just started using one of the ‘tricks’ that’s been researched by the Government’s ‘Nudge Unit’ to persuade tax avoiders to do the right thing and pay their tax.

The trick … stick a handwritten post-it note on the letters that ask for payment.  Simple.

The Government’s ‘Nudge Unit’, or Behavioural Insights Team to give them their formal name,  use insights from behavioural research, tests and trials, with a view to ‘enabling people to make better choices for themselves.’  This could be getting people to pay their tax, using public services only when they need them, or making appropriate career choices.

The non-payment of tax is a similar scenario to the non-payment of invoices, so it might be worth the cost of a few post-it notes to see if it makes a difference to whether the serial late payers start paying on time.

What do the notes say? Nothing particularly earth shattering.  HMRC simply say “Please give me a call if you would like to discuss”, followed by the first name of an individual and a phone number.  That’s it.

They’ve also tried highlighting previous late payments (e.g. ‘Your payment was late last time, so if there are any issues please call …) or their payment performance compared to the wider group (e.g. ’90% of our customers pay their invoices on time …), both of which result in a upturn in payments.

Give it a try and let us know how it goes!

More reading:

https://www.cchdaily.co.uk/hmrc-sending-personal-post-it-notes-tax-avoiders

http://www.behaviouralinsights.co.uk/blog/

 

 

Late payment stories tell the tale of small business struggles

We recently contacted our customers to see if they were willing to share their experiences when it comes to late payments and they were more than happy to share the challenges faced by small businesses in the UK.

In the first couple of years we struggled massively with cash flow. We have to pay for materials & labour and only on completion of a job are we allowed to invoice which we then wait on average 50 days to get paid. Money is so tight that myself & my husband do not pay ourselves big wages

I’ve used your debt recovery service on two occasions when client just didn’t pay and on both occasions the legal letter was enough to get a payment within 1 week.

The trouble is we are a relatively small business that bigger companies seem to think can bank roll them whilst they get their work done.

From stories on no wages for the business owners for months on end through to legal proceedings after 18 months of debt chasing, small business owners are a sturdy bunch and we’re happy to say all of them came out the other side and are continuing to battle for money they’re owed.

As a reward for sharing their stories, the following companies receive these gifts to bring some positivity to their working day:

Proserve Building Solutions in Portsmouth receive a brand new Apple Watch, whilst MB Fire Protection of Dartford and Rutland Scaffolding based in Rutland both receive a year’s subscription to Evernote Premium.  All will receive a year’s free access to our credit information tools.

There will be more on late payments from our small businesses as we share more on what they were faced with and how they’ve developed approaches to handling one of the major challenges of being a small business owner

 

Late payment threatens to derail the freelance industry

UK freelancers are increasingly struggling with late invoice payments, with around half admitting they have considered quitting life as a freelancer because of worries over continued late payment, and 46% stressing about having enough cash to live on.

freelancermainimage

Our latest research here at Ormsby Street, also reveals that one in ten freelancers have faced difficulties paying their mortgage or rent because of late invoice payment, and many have turned to family (37%) or even payday loans companies (36%) to cover a shortfall brought about by late payment.

While a fortunate 19% of respondents say most of their invoices are always paid on time, a freelancer’s invoices are paid on average 18 and a half days after their due date. At any one time, a freelancer in the UK is owed on average £5,431.03 in late payments and 79% of freelancers say that cash-flow is the number one concern for their business.

“Every freelancer knows that late invoice payment is one of the biggest frustrations, impacting cash-flow and causing much stress, from paying the mortgage to having enough money to live on,” said Martin Campbell, Managing Director, Ormsby Street. “For a freelancer to be owed more than £5,000 is clearly unacceptable and threatens the emerging freelance economy in the UK, which brings flexibility and work / life balance to so many.” 

The Office for National Statistics revealed in 2015 that 4.55 million Britons are now their own boss and research by the Association of Independent Professionals and the Self-Employed (IPSE) found three in five businesses agree that it would be difficult to operate without hiring freelancers. The Ormsby Street survey of 1,002 freelancers and sole-traders, revealed that 40% of respondents have taken out a County Court Judgement (CCJ) in the last year to chase a bad debt, and more than half say that late invoice payment is getting worse not better.

It remains a problem for many freelancers when it comes to chasing clients over late payment, partly because they do not have the time to spare, but also because of fears this might impact future work with that company.  57% of respondents say they worry that if they chase for payment that client might not use their services again, while two-thirds say they feel uncomfortable and awkward chasing clients for late payment.

“Why should a freelancer waste their own billable hours chasing payment for work that has been successfully completed and is already due for payment,” continued Martin Campbell. “If customers are not willing to pay within the agreed terms then it’s time for freelancers to become more informed over whom they work with, and either ask for payment upfront or even choose to not work with company.”

Special Freelancer rate!

With 49% of freelancers having had to turn down a contract because of concerns over a client’s ability / willingness to pay on time, we’re offering access to CreditHQ for the special freelancer rate of £12.50 for the standard subscription; allowing freelancers to obtain financial insight into every company they trade with. Sign up here to take advantage of this offer

“Freelancing has grown in popularity because of the choice and flexibility it gives people over their career, but its success relies on the prompt payment of invoices, which is not happening enough,” concluded Martin Campbell. “Credit-checking potential customers and partners is straightforward to do and should be done by a freelancer every time they work with someone, to protect themselves against late payment.”

About the research

An online survey of 1,003 freelancers and sole-traders was undertaken by TLF Research in March and April 2016.

CreditHQ, the credit-checking tool built by Ormsby Street, collates credit and trade information from Companies House, Experian and Dun & Bradstreet and presents that information in simple-to-understand credit and payment indicators, so a freelancer can assess which businesses are likely to pay them on time, or after 30 or more days.

Formed in 2014 to take over the operation of the financial data proposition of BCSG, Ormsby Street is developing the next generation of financial data services for small businesses. Its team of high-performing product innovators and software engineers are quietly taking sophisticated financial information and turning it into a next-generation digital tool to help businesses make good decisions about customers, suppliers and themselves.

Which football club’s finances need a kick-start?

Swansea and Southampton top premier league of invoice payment!

As this year’s football season reaches an end, here at CreditHQ we thought we’d take a look at how good the top football clubs are at performing where it matters – in the payments department!

Small businesses wait on average, 72 days for payment of invoices, and our analysis last year showed the average overdue invoice to a small business was worth a whopping £6,142. 

The Payment Premier League was compiled by combining figures for payment performance and credit risk.

“If a small business wins a contract with their local football team then it is easy to let the heart rule the head, and just go ahead with the work regardless – people love the idea of working for the team they support,” said Martin Campbell. “But our analysis shows that just because a team is good on the pitch, it doesn’t necessarily follow that they will be as strong when it comes to paying invoices on time.”

“Winning a major contract with any sizeable local company is a big deal for a small business, but few would think to run a credit check. Yet the average time for a small business to be paid is 72 days, a period of time which could be seriously problematic for a small business, if the figures involved were big enough.”

Premier Payment league infographic

Sunderland and Crystal Palace were the worst performers on our payment premier league, so if you’re thinking of doing business with either of these teams, follow these simple tips to ensure you’re taking the right precautions to ensure you stay on top of your business cash-flow:

  • Stay on top of your invoice process to get invoices out on time.
  • Follow up before the invoices are due.
  • Chase invoices when due and always charge interest on overdue invoices (or issue a letter of intent).
  • Review payment terms for this company, including payment up front if you are really worried about the impact of late payment.
  • For major concerns about a customer’s financial health, don’t be afraid to walk away from a deal.

Check out who you’re doing business with at www.credithq.co.uk

Ormsby Street to demo CreditHQ at Finovate Spring

We’re heading off to San Jose next week, as we’ve been selected to present CreditHQ at the prestigious Finovate Spring event in San Jose.

Finovate Spring is a demo-based conference for innovative startups and established companies in the fields of banking and financial technology. Held in San Jose, California, the event offers an insight-packed glimpse into the future of money via a fast-paced, intimate, and unique format.

 

Finovate Spring

FinovateSpring is a conference on steroids and a great opportunity to see new technologies and upcoming companies changing the world of financial technology.  Victor Smilgys, Keypoint CU

Competition is fierce to appear at this event, with around 70 companies from the financial technology sector showcasing new products or technology over the course of two days – both on stage and on their company stands to an audience of over 1500; including investors, VCs, entrepreneurs, expert analysts and influential press.

Our CEO and co-founder, Martin Campbell, will be presenting some great new features of CreditHQ, including our new bookkeeping integration. Of the integration, Martin said:

When connected to Xero, CreditHQ, like a good financial controller, monitors every customer and every invoice the company has.  Unlike a financial controller, it has access to real-time credit scoring and payment performance information from multiple sources as well as insight into thousands of other small businesses using the product to chase invoices and recover debts.

Combining these data sources and feedback from tens of thousands of users using a patent-pending data-driven approach, the next generation Insight Engine is able to identify cash flow problems and credit risks for your business and highlight the most effective way to resolve them, and present a prioritized action plan to the business leader who can then simply approve the actions that the insight engine has planned.  

As well as highlighting actions for our own customers, our bank partners who provide the product to their SME customers, also gain insight to help them target the right products and support at small businesses customers they historically have very little data about.”

If you’re heading to Finovate, please come and say hi and let us show you how CreditHQ can help all small businesses combat the problem of late payments and focus on growth and success. For 20% off your ticket(s), use code: OrmsbyStreetCompFS16