Improve your cash flow by overhauling your credit policies!

Clear credit control policies reduce the likelihood of bad debts, reduce finance costs, & ensure efficient cash flow planning.  Now is an ideal time to review your practices!

“If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.” – John Maynard Keynes


Well, it may not be a million dollars, but it can become a serious problem if you don’t have control of your receivables.  I like to think of credit control as a series of simple steps. 

  1. Have a credit policy
  2. Obtain credit applications and have a procedure to approve the applications.
  3. Bill regularly and provide concise, legal invoices, which provide payment details.
  4. Review debtors, send out reminders and contact delinquent clients
  5. Act on outstanding payments

Step 1, Have a Credit Policy

  • Your credit policy is the blueprint for all your credit procedures.  It sets out the circumstances in which you will extend credit, how the credit applications will be assessed and how your clients will maintain their credit standing.  It’s a great document to have hanging on your wall as a reminder for staff and customers alike!

    You’ve probably already seen one example of a credit policy hanging up on the wall of your favourite restaurant.  It goes a little like this - “No credit will be granted unless the applicant is over the age of 90 and accompanied by both parents!”

  • Step 2, Obtain and approve Credit Applications:

    One area often overlooked (especially by small businesses) is getting credit applications returned.  Do you know your customers legal names, their directors, or even their ABN?  Have they signed off on your terms and conditions?  Do you have Director’s guarantees in place? 

    If you don’t have a credit application, and need some inspiration, you can download one for free here: (you’ll also find some other useful tools like a sample Credit Policy, and Trade Reference Form).  You’ll also need a set of terms and conditions which will suit your business type and industry.  (It is a good idea to get some legal advice on this one!).  Also don’t forget to include a privacy policy as you may need your customers’ permission to obtain their credit information.

    Once you have received a signed credit application, you will then need to review the applicants’ ability to pay.   The first step would be to contact the credit references provided, and find out as much as you can about the applicant’s financial stability.  Remember, your customer will usually only put forward their best references - so you may also wish to do some further checks.  One option is to purchase a credit report (companies like Dun & Bradstreet provide these) or request a copy of their financial statements.  If you are still unsure, don’t overlook the option of starting a customer on COD and then progressing them to an account once they have demonstrated their ability to pay.


    Step 3, Bill regularly:

    It might seem obvious, but if you are billing regularly; your customers will be more likely to pay you regularly and keep you on a regular pay cycle.   You should also make sure that every invoice you send is a valid, legal tax invoice, which has a clear description of the goods/services provided, has all your contact details, your ABN, your address, your payment terms and how to pay (including bank account details and a credit card slip if you accept these payment types).  Note: the more payment methods you accept, the easier it is for people to pay you.

    If you have engaged a debt collection agency, you can also add their terms and conditions to the invoice.  MYOB users can easily incorporate Dun & Bradstreet terms and conditions, as per the following MYOB support note:

    Also, don’t forget to send out regular statements as they give your customers the information they need to reconcile their accounts which, again, makes it easier for them to pay you.


    Step 4, Review your debtors:

    Good bookkeeping practices will make this step much easier.  It is vital to keep up to date with your receivables allocations so that your reporting is accurate.  There is nothing worse than calling a customer chasing payment when they have already paid!  Once you have updated your ledger, check for any customers exceeding their payment terms.    These customers should then be contacted immediately to request payment.  This is a great opportunity to find out the cause of any payment bottlenecks.  Are they receiving your invoices on time?  Are the invoices addressed to the correct person?  Are you missing Purchase Orders or any other information that they need to make the payment sooner?  Be helpful and provide the customer with any information they need straight away.  A contact log should be kept, and any follow up / reminders scheduled for future dates. 


    Step 5, Act on outstanding payments

    Your first line of defence against bad debts is the telephone.  Remember to follow up outstanding accounts promptly. Keep phoning, and after a few occurrences you will often find that customers start putting your invoices to the top of the pile for payment, just to avoid receiving another phone call!  The threat of stop supply is also a great incentive to get those accounts paid.  However, after the phone calls/emails etc, if you still haven’t received a satisfactory answer you may have to consider formal debt recovery procedures.

    The process starts with a letter of demand; stating the amount owed and a clear description of the goods/services provided, as well as the required payment date (usually 14 days), payment details (e.g. your bank account) and the next action to be undertaken should payment not be forthcoming.   If your customer is experiencing extreme financial difficulties you could consider offering them a payment instalment option.  You should also provide copies of past invoices and document all previous attempts to obtain payment.  The letter of demand may be used in court as evidence of your attempt to settle the matter so it is important that it clearly sets out the case.  

    After this point, should the payment still be outstanding and no bona fide answer for the debt be made; you may choose to refer the matter to a collection agency or to deal with the matter yourself and proceed with legal action; or indeed; you may make the commercial decision that the debt is unrecoverable and choose to write it off.

    Whatever option you choose documentation is king!  Make sure you have all communication in writing and retain it as part of your records.  Seek legal advice when needed, and remain courteous and responsive to your customer – sometimes you get a surprise happy ending!

    “When a person with money meets a person with experience, the person with experience ends up with the money and the person with money winds up with the experience” – Harvey MacKay”