Not all customers pay their bills within the agreed-upon payment period, so be sure to have an effective credit management strategy for late payments. In the event of late payments, call the customer and follow up with a written reminder that you are expecting payment within a reasonable time, such as one week.
If payment still does not come through, you can then send a warning and eventually a formal written notice. This typically asks for payment within two business days and presents a specific date by which the money must be received before legal proceedings will commence. Given the costs associated with late payments, also consider adding fees to account for collection and interest costs.
In the event that you enter into an agreement for a late payment schedule, put the terms of the agreement in writing and clearly note the following:
- The total amount due
- The payment periods
- The specific dates on which payments must be received
- Your bank account number and other routing information—if payments will be wired/transferred electronically
You should also monitor the customer’s progress. Are they complying with the rules? Is there any possibility they are on the verge of bankruptcy? Also, inform your credit rating agency. Late payments by your customer may have implications on your own creditworthiness.
Document and Evaluate Your Credit Management Process
Communicate your credit management process to other departments within the company to ensure the tasks and responsibilities of individuals in other departments are clear to everyone. In some cases, they may be able to play a key role in collecting invoice payments. Also set clear limits on required actions from other departments and make people accountable. Evaluate periodically as to how well your credit management process meets the needs of the organization.
Be sure to review each customer with a frequency that aligns with the perceived risk that the particular buyer presents and its potential for default. Be careful not to hold a bias because of personal relationships. Just because you have a good relationship with a customer, doesn’t mean they won’t default.
Set Ambitious Customer Credit Management Goals
The value of effective credit management is sometimes underestimated: Done well, it avoids unnecessary risks, creates opportunities for improvement, and frees up your company’s working capital for critical business investments. It thus makes sense to set ambitious goals and actions, measure your performance periodically, and apply change when necessary.
A few examples of objectives you can establish for strategic credit management:
- Identify the average Days Sales Outstanding in your industry.
- Lower your Days Sales Outstanding (average number of days invoices go unpaid) to X number of days within a given period (your findings from the objective above can help you determine a sensible benchmark).
- Reduce the number of bad debts and annual depreciation.
- Compare your results with those of industry peers.
- Maintain a healthy diversification of buyer portfolio.
As you put these tips and practices into use, keep in mind that credit management is not a one-off project. It’s a process you must keep working on all year. With success, you can accelerate invoice payments and help optimize the working capital your organization has to work with. This creates funds your company can invest in the future and proves the value of effective credit management to the entire organization.
Euler Hermes: A Trusted Partner In Customer Credit Management
Even a well-defined strategy can’t cover all risks. Credit insurance can help. Euler Hermes provides your company access to the most accurate information on customers, prospects, industries and countries. Our team of experts provides active monitoring on all accounts, a structure and discipline for credit decision making, resources for collections and payment when your insured customers fail to pay. Credit insurance takes the guesswork out of your company’s credit process, giving you the confidence to safely grow your business at home or abroad.
Learn more about trade credit insurance from Euler Hermes to supplement your customer credit management process.