A sale is not a sale until the money's in the bank

Do not just sell and expect to be paid! This is the warning being issued to small businesses by the Better Payment Practice Group [BPPG].

The BPPG is advising businesses that they may achieve improved payment performance from their customers by developing and implementing a strategy which identifies priorities and sets realistic collection targets. The following tips may help businesses achieve an efficient collection strategy:

• The 80/20 ratio should be applied to identify the few major customers which buy 80% of the business’ sales and which therefore pay the most. For these major accounts, good credit agency reports should be obtained to indicate the right level of credit. Major customers should also be primed to receive priority treatment. For the mass of non-major accounts, the right individual’s name must be obtained for letters and phone calls, and invoices sent to them directly.

• Communicate credit terms clearly to customers. The credit period should be agreed during the sales negotiation and it should be stressed that the creditor’s payment terms as a condition of sale supersede any of the customer’s terms. Invoices and statements should also boldly state the credit terms.

• Businesses should work to a monthly cash target to achieve a specific Days Sales Outstanding (DSO) ratio. This measures total debtors against total sales made. There should be constant pressure to reduce DSO, which is the average time customers take to pay. Secondary targets can be set to reduce certain kinds of debt, e.g. overdue 60 days above £500.

• Targets should be supported with a set timetable for following up accounts, showing which actions (initial invoices, reminder letters etc) need to be taken and when.

Richard Wilson, Business Policy Director at the Institute of Directors, comments: “The objective of every business is profit, not sales volume, and small businesses should have a collection strategy in place which ensures the customer’s payment reaches their bank account - fast!”

You can keep up to date with the Better Payment Practice Campaign by sending us an email