Blood from a stone

It would be unfeasible to run any enterprise of scale without extending and accepting credit. Trade credit is actually a crucial source of funding for companies and is on average ‘twice the size’ of bank credit, according to the Credit Management Research Centre (CMRC). As trade credit is a two-way transaction – where companies use trade credit as customers, via accounts payable, and provide it as suppliers, through accounts receivable – it is a significant part of corporate liabilities and assets. In fact, in the UK corporate sector the CMRC calculates that more than 80 per cent of daily business-to-business transactions are on credit terms and that trade debtors are ‘usually the main (and riskiest) asset on most corporate balance sheets, representing around 30 to 35 per cent of total assets, on average, for all companies’.

UK businesses take an average of 54 days to pay their bills, reckons credit management specialist Intrum Justicia, adding that about 44 per cent of accounts receivable of the companies registered in this country are overdue, equivalent to more than £30 billion. Findings from PricewaterhouseCoopers (PwC) indicate nearly one in five companies regard current debt levels as the ‘biggest threat’ to survival.

In the UK, the Late Payment of Commercial Debts Act in 2002 was introduced to help assuage the problem. This enabled small businesses to charge interest at eight per cent above the existing base rate on debts due from large businesses, public sector bodies and other small businesses, and to claim a contribution towards the cost of a collection agent's fees. However, SMEs typically feel they may lose business by charging their larger customers interest.

Taking action
So, what to do if your cash flow has been reduced to a dusty dribble because your debtors aren’t stumping up the cash? Firstly, stop the rot, chiefly by getting a good grip on your credit management. When Michael Wilmshurst became chief executive of Nationwide Accident Repair after a hostile takeover in 2002, he soon realised credit control was not part of company culture. ‘It appeared that we were just lending our customers large sums of money and it would’ve been a lot more useful to us in our bank account instead.’

In fact, the company had debts running over 120 days amounting to £1.6 million. But Wilmshurt’s commitment to reducing this figure means it now stands at just £115,000 – how did he do it? ‘The first action taken was making sure we were invoicing the right amount, not just sending out invoices and making corrections after, which adds to the time it takes.’

Research from PwC has found that around 85 per cent of the reasons for non-payment are due to invoice queries or poor administration. Wilmshurt’s second pillar of credit control is to make sure the invoice is being sent to the right place. ‘You wouldn’t believe how many times invoices are sent to the wrong address, especially when dealing with large firms. When you’re dealing with a multi-site businesses you need to make sure you’ve got the right one for each invoice.’

The next practice Wilmshurt installed was a ‘structured process’ for the debt chasing procedure, including making follow-up phone calls after certain periods of time and re-sending of invoices after another interval had passed. He established a weekly review to see what was due in 30 days, in 60 days, and so on. ‘It wasn’t too complicated – the figures for all our sites fitted on one sheet of A4 paper.’

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