Following are some tips on how to operate an efficient and bullet-proof credit and collection system.

1. Credit Policy.

Create a credit policy that all your staff and customers can understand. This policy will be the basic building block of any credit and collection system. The policy should define all situations for handling different areas of work and a full range of customer types as well defining the payment terms which apply in each case.

2. Customer Form.

An error most businesses make is the failure to use a customer form. This should be simple and include ongoing customer standing instructions. It is very important to outline the entities covered by the customer and, whenever possible, to provide for the liability for payment to be on an individual(s). For example if you are going to give a Pty Ltd company or a Partnership credit it is best if the directors or trustees acknowledge, through the customer form that they are jointly liable for all fees and charges relating to works/services carried out.

3. Trading Terms.

Terms and conditions should be outlined in the body of the customer form so that there can be no argument later as to what terms apply. Essential trading terms include: -

• Authority to your business to cease working on the customers goods/services when there are invoices   outstanding beyond a specified period e.g. 60 days
• The right to retain the goods/services until such time as all accounts are paid.
• No right by the client/customer to set-off any claim he may have against you, against your claim for payment of the outstanding accounts
• Where there is more than one party, each person is to be liable jointly
• The right to add collection commission, interest and costs to any account which is referred to a collection agency or local court.

4. Review your Customer.

If your customer has a bad credit history with you do not commence any further work until all arrears are paid. You may also consider asking for half or full payment upfront. If you are taking on a new customer and have concerns about their credit worthiness, you should contact the customer’s accountant.

5. Active Collections.

As there is usually an ongoing relationship with your customer it is best that you delegate the task of chasing up debts to another staff member in your company who has no relationship with the customer.

By following the steps above you will substantially improve the cash flow of your company and reduce the risk of having to write off bad debts.  
 

Disclaimer: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in this article is for guidance only and should not be relied upon without obtaining professional advice having regard to your specific circumstances.