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10 early warning signals for credit management survival
With over 10,000 businesses failing because of late payment each
year, the Better Payment Practice Group [BPPG] advises businesses
to be alert to the signs of a failing credit management policy.
The BPPG has identified the following top 10 early warning signals
that a business’ credit management policy is in need of improvement:
1. Hitting the overdraft limit - If your business regularly reaches
or breaches the limit of your bank’s credit facilities,
review your asset management policies in general and credit management
in particular.
2. Extended aged-debtor lists - If your debtors are persistently
paying invoices outside the agreed credit period, assess your
collection methods and identify areas for improvement.
3. Good payers slowing up - If customers who usually pay promptly
start to slow up their payments they may have recognised your
collection system is slack.
4. Quality complaints - Customers may start to take advantage
of an inefficient system by using spurious complaints and queries
to extend the credit period available and improve their own cash
flow at your expense.
5. Administrative excuses - Excuses such as ‘computer failure’
may also be a sign that the customer has recognised your credit
system is lax and capable of exploitation.
6. Customer insolvencies - Credit insurance or a strong internal
system of credit risk assessment can protect your company, particularly
if it is too heavily reliant on the business of one particular
customer, or has a range of customers who are vulnerable in cash
flow terms.
7. Supplier stops - If your business is not paying its own bills
there will inevitably be a point when you exceed your credit limit
and supplies are halted.
8. Credit ratings and market rumours - Both will damage your
prospect of attracting new business and will potentially further
constrict cash flow.
9. Arrears of PAYE, NIC and VAT - Do not be tempted to seek credit
from the state by not paying your tax. Government departments
have the power to immediately seize assets, without prior warning.
10. Low staff morale – Staff are sensitive if your business
shows signs of distress such as having difficulties with cash
flow. You risk losing your best employees, making the situation
worse.
Clive Lewis, Head of the SME Unit at the ICAEW and member of the
BPPG commented, “Cash flow is the
life blood of every business and should be protected as a priority.
A good credit management policy will include a strategy for credit
checking customers, a well-planned collection process and a system
for dealing with queried invoices.
Not every credit management policy will be fool proof but it is
important that businesses identify and respond quickly to the signs
that it is failing.”
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