Ifac is advising Galway SMEs and start-up businesses to get their credit under control to ensure long-term survival
Julie Burke, National Credit Controller of Ireland’s farming, food and agribusiness specialist professional services firm, says credit control is at the heart of every business.
"It brings money into the business. This in turn means it can be pumped back out in many different directions to keep the business alive. And of course, if it doesn’t come in, it can’t go out and the business suffers.”
Common mistakes businesses make in their first five years
Overtrading: Avoid taking on every bit of business that comes in. This may sound counter-productive, but if a business owner over-promises and under-deliverd, this will be much more damaging to its reputation. It is better to take on what one can confidently complete to a high standard and build on that.
Avoiding the talk: New businesses get so caught up in generating new business that they avoid following up for payment. Whatever the credit terms, every business should be actively following up after this date with any fees due.
The see-saw effect: Instead of chasing payment with their customers, a lot of young businesses will opt to avoid paying their own suppliers, dragging out credit terms, extending limits, etc. In effect, just passing on their credit control issues to their suppliers. Eventually, suppliers become frustrated and stop supplying and this is where the business is stuck. They cannot get paid and they cannot get more product.
Unpredictable events: Over the past two years everyone has seen what can happen when something nobody could have planned for occurs. Having a good handle on credit controls means a business can respond to these events, pivotthe business and continue on with little to no interruptions.
Eaten bread is soon forgotten: The longer a customer is left without paying, the less likely a business has of securing the full payment. People forget what a great job a business may have done did six months after. They are also more likely to start complaining about the service. To keep a strong, healthy relationship with customers, it is better to agree as much as possible up front, in writing and after, and follow up persistently until payment is received.
How avoid the pitfalls of managing the business’s credit poorly?
Polite persistence: Follow up consistently with all debts past credit terms. The customer needs to feel “they have been chasing this, I better sort this out”.
Put credit control at the top of every agenda: Just like customers, one can’t put one's head in the sand. Deal with credit control, analyse it weekly at a minimum and ask the hard questions. Remember it is the beating heart of every business. A healthy cash flow equals a healthy business and total debt should never be more than 10 per cent of annual income. This is the target to work towards.
When is a sale a sale?: Businesses often focus on sales, sales projections and promises of sales! A sale is not a sale until it’s in the bank. Compare your expected sales every month to what has actually come in. They will be two very different figures, but only one of them is real.
Deal with it - Whatever issues arise from chasing debts, deal with them. Remove any barriers to payment. If a customer complains that they have not paid because of a certain reason, follow that feedback until it is fixed. Then it is back to chasing the payment.
“If looking to start this process today, my advice is to start with the worst and work backwards. For example, look at all aged debt over six months, pursue every lead, follow up and chase this debt. When satisfied all has been done, move the goal post and work from 60 days credit and so on. The key to this is breaking it down into manageable portions so that you can manage it.
“Finally, it is also important to ask, why? Why did a person go into business in the first place? It’s most likely because that feel they have something really great to offer, want to do well and want to be around in 10 years. To ensure this get credit under control today and that will allow one to more confident of gthe business and its future tomorrow.”
For further information and/or advice contact your local ifac office or visit ifac.ie
