How to successfully manage your accounts receivable without a credit controller

How much does your business lose to bad debt or outstanding customer credit notes?

Most UK SMEs are being hit hard right now. Xero found that going into Covid-19, UK SMEs were collectively owed around £131 billion in outstanding payments. That’s around £23,000 each. Things didn’t get better after that. Late payments continued to increase in a time when small businesses are strapped for cash and fighting to survive.

Optimising your cash flow and working capital is essential. You need to use every resource available, especially the funds that are owed to you. Writing off old debts or letting outstanding invoices linger just isn’t something we can afford right now. But, extending credit is very much still a part of doing business.

Mismanaging your account receivables can easily cost your business thousands. If you don’t have a dedicated credit controller, you need to carefully tend to this area. Managing customer debt is an entire discipline in itself, and here are a few guidelines to get you started.

Mismanaging your account receivables can easily cost your business thousands. If you don’t have a dedicated credit controller, you need to carefully tend to this area.

Develop good credit control policies

The first thing you need to do is develop your company’s credit control policies. This sets out your standards for extending and collecting on debts.

This should include your internal processes, credit checking protocol, approved payment terms and conditions, risk management method, and accepted payment options.

Make sure your entire team is aware of their individual roles and responsibilities. If you don’t have a credit controller, managing debt will be spread throughout your company.

Maintaining clear written credit policies benefits you, your employees, and your customers. You can create an executive-only set, general internal protocols, and customer-facing policy.

Use a template to jumpstart this process.

Issue credit appropriately

You should always know a customer’s credit score before considering any delayed payment agreement. This should also tell you their maximum recommended credit allowance. But, don’t just run a credit check and consider yourself done. Assess their current ability to meet debt obligations by looking into any late or missed payments.

And remember to thoroughly investigate international or cross-border customers. Lending credit to an unstable or untrustworthy business will hamper your own ability to manage cash flow well.

You can also consider factors beyond financial ratings.

•   Do you understand your customer’s market, how well they’re doing, their ability to get things done, and general competence?
•   Does a new customer with a great financial profile want a large amount of credit? This may be a red flag.
•   Does an established customer want an unusual amount of credit to try and fight a poor economic environment on your dime? Think carefully before lending.
•   Was there a recent management change in a company with a stellar financial history? This can alter their practices.
•   Or has a company with a shoddy background recently brought on a new team? You may want to extend them credit to help build a profitable new relationship.

It’s a good idea to re-assess your customers periodically. And make sure to maintain these credit-issuing standards for every one of your customers. Especially the ones you know well.

Maintain your customer master data

Once you’ve issued a customer credit or established payment terms, go in and update your customer master records. The customer master data you have should accurately reflect everything going on in your invoicing, billing, and collection systems. Any credit-related term or agreement you make with a customer must be included in their customer master data. This needs to show your customers’ full credit profiles.

Always keep these records updated. Making mistakes here can slow or disrupt your accounts receivables. You don’t want to accidentally record payment terms of 90 days when it should only be 45.

Here are a few tips for customer master data management, courtesy of Deloitte.

•   Centralize your data management process
•   Assign one person ultimate responsibility
•   Audit your master data regularly
•   Watch out for red flags like unusual credit limits or odd payment terms
•   Document any changes or updates made
•   Run changes by your accountant first, to optimize cash-flow management and forecasting
•   Restrict editing access to key personnel only, to prevent unapproved changes

Maintaining proper data hygiene practices will keep your accounting accurate and receivables flowing as intended. And it will prevent any due payments from slipping through the cracks.

Resolve invoice disputes

Occasionally, a customer will flat out refuse to pay an outstanding invoice. Some customers may claim to have already paid you. Other customers might contest the invoice amount, credit terms, fee schedule, or other conditions.

This can happen out of genuine confusion and forgetfulness. Other times it’s an attempt to get out of paying what they rightfully owe. Regardless of their intent, your task is to prove what they owe and what payment terms were agreed to.

If you don’t have someone who can handle this, you might be tempted to write disputed invoices off. But this can quickly eat away at your cash flow and working capital. It’s best to develop a dispute resolution procedure well in advance of any issues. Here are a few tips you may want to consider:

1.     Always remain professional, as this may be an honest mistake and you don’t want to damage your business relationship
2.     Include detailed terms on your invoices
3.     Establish a provable, traceable record trail by using online proposal, contract, invoicing, and payment tools
4.     Have a way to show customers their entire invoice and payment history
5.     Keep your records in good order to prevent administrative errors on your end

Resolving invoice and payment conflicts is part of doing business now. Don’t take disputes personally and don’t give in to their claims.

Optimize your general collections

This is critical. You can severely harm your own business by extending customers too much credit at once or being lenient with their repayment schedule.

Analyse your own cash flow needs before agreeing to any credit extensions or solidifying payment plans. Always work off what you can realistically afford to do. Relying on your customers to remember invoice due dates is a sure way to fall behind. So, you should also create a payment reminder and follow-up plan.

A good invoicing tool should be flexible enough to adjust to any payment schedule.

But you may need a separate credit management system that can send out upcoming payment reminders ahead of time. Include notes refreshing your customers of the terms they agreed to.

You might want to automate this entire process. That way you won’t have to rely on your own memory either. With Chaser's credit control software, you can put an end to late payments and manually chasing tasks by setting up schedules to send out polite payment reminders to your customers, both before and after the invoice is due. With the centralized Hub in the Chaser app, you can also see all your chasing activity and customer replies in one place, making it an essential tool for all companies that don't have a dedicated credit controller. 

You can severely harm your own business by extending customers too much credit at once or being lenient with their repayment schedule.

Manage incoming payments

You should always know which account is up to date. And you need to know which invoices have been cleared. Every incoming payment needs to be allocated to the correct customer and the relevant invoice. Ideally, this should be handled automatically via a payment management tool. If you aren’t using one, manually update your invoice and customer debt records as payments come in.

Don’t just apply customer payments to a general debt leger, suspense accounts, or their oldest outstanding invoice. Each one needs to be tracked precisely. This will help you when it’s time to do financial reconciliation. It will also make it easier to send reminders for the correct outstanding invoice, and you can expect a dispute if a customer gets a late payment reminder for an invoice they intended to pay. Especially if they were trying to clear up accumulating interest or late payment fees on a specific invoice.

Reclaim that outstanding debt

Customers who fall behind on payments need to be treated carefully and with respect. Aim to spare them any embarrassment.

This will both preserve the business relationship and maximize your chances of retrieving your payment. Focus on how to be friendly, but firm at the same time. Collecting outstanding debt takes a proactive, consistent outreach approach.

You may want to use several communication channels, such as phone calls, letters, or quick SMS reminders. Analysing your customer’s profile can help determine which method will be most effective. Additionally, you might need to renegotiate payment schedules in exchange for partial immediate payment. Or offer discounts to clear the entire amount. Whatever happens, don’t just give up and write it off as bad debt.

If this is too difficult or uncomfortable for you, or you’d rather not engage in these interactions with your clientele, you can always opt to bring in experienced SME collection specialists to handle this.

Optimize your own time

How much of your time do you spend chasing payments? For most UK business owners, it’s at least 10% of their day. If you don’t have a dedicated credit controller, you might think this is the only way to bring outstanding payments in. It isn’t.

You don’t have to choose between preserving your time and energy or getting your payments in. You can use specialized accounts receivables software to manage this process for you. And fully automate it.

Chaser will stay on top of your accounts receivables, get you paid on time, and reclaim any outstanding debt!