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Don’t Ignore This 12-Step Program to Good Credit Management

By: Anne MacRae


Good Credit Management

Cash flow is the life blood of all businesses and having too much working capital tied up in late and non-paying customers can spell disaster for a new small business.  According to a U.S. bank survey, the majority of small businesses fail within the first five years, and roughly 82% fail because of poor cash flow management.

So how does a business get into cash flow trouble?  One of the main culprits is having to pay suppliers before being paid by customers.  As sales grow, more working capital is needed to maintain operations.

In accounting terms, it’s having longer Days Sales Outstanding (DSO) versus Days Payables Outstanding (DPO).  DSO measures the number of days it takes a business to collect cash from its credit sales.  In other words, it shows how well a business can collect cash from its customers.  The sooner cash can be collected, the sooner this cash can be used for other operations.

Conversely, DPO measures the average time it takes a business to pay its bills to suppliers and other vendors.  A comparison of DSO versus DPO can be used to judge how well the business is managing its cash flow.  If a business gets paid by its customers before it has to pay its suppliers, it has access to more cash to grow the business.

Conversely, if a business has to pay its pay suppliers before it can collect from customers, is will eventually run out of cash for operations.  The cash flow balancing act can be especially challenging when customers pay late.

Half of all net-30 invoices owed to small and medium sized businesses are paid late according to a 2015 study by Fundbox, an online funding platform.  So ensuring good credit management practices can be the most important thing a small business does to help it beat the odds and succeed over the long term.  But determining who gets credit, how much, and for how long, can be a difficult and time consuming exercise for a new small business, especially when growing sales is a priority.

It is very difficult to turn down a sales opportunity but not following good credit management practices at the front-end can be disastrous at the back end when you don’t get paid.  Remember, a sale isn’t a sale until you get paid!

The following are 12 steps small businesses should take to ensure good credit management practices.

  1. Have clearly defined credit policies including conducting credit checks on all customers before offering credit terms. Make sure all members of the team, including sales people, are aware of, and follow, the credit policies.
  2. Know your customer!  Research your customer before signing a contract and before agreeing to provide credit or sell on terms.  Use various information sources including credit bureaus and ask for trade and bank references. Existing customers should undergo periodic credit reviews, especially as sales grow or if payments arrive late.
  3. Clearly lay out all payment terms and conditions in writing on all contracts and get your customer to sign the contract.  You can have them sign a separate payment schedule.
  4. Ask for down payments and/or progress payments for large or lengthy contracts.  For example, ask for a 50% down payment, so that your direct costs are covered before the product leaves your door.
  5. Have your customer sign a receipt or proof of delivery confirming the customer has inspected and accepts the goods as delivered.  Verify that the person signing has the authority to do so.
  6. Submit invoices electronically and immediately upon delivery of the goods or service.  Ensure all invoices include:
    1. Your company’s name, address, telephone number and contact name
    2. Your customer’s name, address and contact person
    3. Corresponding Customer Purchase Order Number
    4. Payment instructions including electronic banking details
    5. Accurate itemized list of goods or services delivered
    6. Net Price
    7. Applicable taxes (with taxation number)
    8. Total Due
    9. Payment terms and due date
    10. Late payment charge policy
  7. Offer discounts for early payment such as 2% discount for payment within 10 days.
  8. Call your customer after sending the invoice to confirm receipt and highlight payment terms and due date.  Follow up immediately by telephone on overdue accounts.
  9. Accept multiple payment options including checks, EFT, ACH, e-transfers and credit cards.  Make it easy for them to pay you!
  10. Refuse new orders from overdue accounts and implement COD policies for chronically late payers.
  11. Purchase credit insurance for large customers and/or international customers.
  12. Do not pay sales commissions until payment is received.  Again, a sale is not a sale until the cash is received.

It’s understandable for a new business to want to accept all sales opportunities, but getting paid late, or worse yet, not getting paid at all, can destroy a business.  Establishing clearly defined credit policies and following those policies is a must for all businesses.  The time and effort spend on good credit management practices at the front-end can prevent a whole lot of pain at the back end.

Published: April 23, 2018

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Anne MacRae

Anne MacRae has been in the factoring, trade financing, and asset based lending industry since 2006 and is the Vice President of Business Development with Express Business Funding, a leading factoring and ABL company. Having owned her own business in the past, Anne brings a deep understanding of the challenges entrepreneurs face in obtaining financing and managing cash flow and she has used this experience to help hundreds of clients secure funding to grow their businesses. Anne sits on the board of directors of the International Factoring Association, Canada Chapter, and is a regular contributor on panels and in publications on alternative lending. Follow @annemacrae1 on LinkedIn.

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