10 golden rules of cashflow and credit control

1. Consider whether you need to provide credit in the first place

Businesses provide credit without considering whether their clients require or expect it. The first step to effective credit control is to consider whether your business will provide credit and, if so, to whom and on what terms.

2. Establish your terms of trade

Business terms and conditions of trade are the rules upon which you are prepared to do business and provide credit, if structured correctly, to form the basis of any contract of sale. You need to make your client aware of the terms of trade prior to the time of purchase and, ideally, these should be acknowledged by the client.

3. Establish who you are dealing with

If you are providing credit, you should require proof of identification and proof of ability to pay by insisting on identification and trade references.

Next step: take a photocopy of the ID and actually telephone the referees.

You should then undertake a business-name search and/or company search to confirm the accuracy of the information provided by the client.

4. Use a credit application & personal guarantees

Implementing a well-designed credit application and incorporating directors’ personal guarantees will be invaluable when commencing legal action to recover a debt.

Typically, your credit application will have the following information:

• full name and address of the client including business name, ABN – for a company, include the ACN and full names and addresses of the directors

• depending on the limit of credit to be extended, you may require evidence of ability to pay, such as the provision of financials or a letter of credit from the client’s bank.

You should set a credit limit based upon the risk of each client and your cashflow requirements.

Remember that a one-paragraph guarantee is most likely unenforceable.

5. Secure your debt

In some cases, the difference between being paid or not depends upon whether you, as the creditor, hold security over a debtor’s property (personal or real estate). Ensuring that your terms of trade include a properly drafted retention of title and/ or charging clause may set you apart from other creditors and will give you the ability to caveat and/or sell a debtor’s property.

Regular invoicing and follow-up is essential to good cashflow.

6. Use a system – review your accounts on a regular basis

You should create and use a system to monitor your invoicing and collection activities. Regular invoicing and follow-up is essential to good cashflow.

Always know how much credit you have extended to your clients and do not extend beyond credit limits without making a conscious decision about the risks.

7. Avoid special cases

Making special arrangements can backfire. No client is so large or important that you should let them ignore your terms. Insisting that your clients comply with your terms will create a healthy respect for your business, rather than damage your goodwill. If a client is unable or unwilling to comply with your terms, you should ask why. It may only take one exception to drain your cashflow.

8. Classify bad debt versus slow payers

Differentiating bad debts from slow payers is critical when making a decision as to how you are going to deal with a debtor.

Once you have identified a bad debt, you should deal with it in a methodical and legal manner. Slow payers may simply need a push and a reconsideration of credit limit.

Before embarking upon collection of a debt, make a decision on whether you wish to keep the business relationship intact.

9. Have a plan to collect bad debt

In planning to effectively collect bad debt, your planning should include the following:

collection letters
demand letter
legal flow chart
credit-management operations manual detailing all the steps required to commence litigation and enforcement proceedings