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03 June 2014

Getting Paid on Time

Posted By: AIB Business
Getting Paid on Time

Now, more than ever, companies have to retain a focus on cashflow and late payments. The reality for many firms is that if people are allowed, they will use your company as their cheapest source of interest-free credit, writes Aviné McNally from the Small Firms Association.

Getting paid on time is a never-ending problem for most small businesses. Research1 conducted by the Small Firms Association shows that late payments continue to be a problem for 95% of small companies. This causes serious cashflow problems, requires firms to extend overdraft facilities or engage in additional borrowing, and consumes a great deal of management time. This, in turn, affects the ability of the business to compete, be profitable and expand.

Too many small businesses think debtors on the balance sheet represent assets. But until they have paid up, those figures are worthless squiggles on a piece of paper.

Credit Management Policy

It is essential to have a proactive credit management policy, which establishes credit worthiness and tracks the type, amount and due date of invoices. If credit is not required, do not give it. Your credit policy must place the emphasis on getting paid on time – all the time! The test of the value of credit management is its ability not merely to collect overdue accounts but also to enable the company to achieve the maximum overall profitability from trading. While overall responsibility will lie with a specific person/section within an organisation, credit control is everyone’s responsibility and is a critical area for the entire organisation. In drafting the credit policy, the full organisational framework must be considered i.e. from sales through to credit collection. A company’s credit management and credit control is a vital part of a firm’s financial management system, and has to be considered on three different levels.


  1. Credit Policy

    Do you understand your customer base? 
    If your client’s customer base is B2B (business to business) or B2C (business to consumer), different credit policies may be required.

    Will personal guarantees be sought for limited companies with no credit history?

    How much credit will be offered officially or unofficially to customers?

    How much flexibility will be applied?

  2. Credit Assessment

    Who will be given credit? Up to what limit and after what checks?

    How will credit limits be assessed, monitored and changed?

    Who makes the final decisions?

  3. Cash Collection

    What methods will be used?
    How will the system be organised?

    Will late payment interest be applied?



Assessing the Customer

The calibre of potential and existing customers should be analysed in order to direct sales efforts towards those that will yield the greatest return. Existing customers can be classified in terms of profitability, value of business and sound financial standing.

Ratings on these criteria will determine whether to:

  • Build the business relationship
  • Direct efforts towards increasing sales
  • Maintain tight credit management
  • Terminate the relationship.


Opening New Accounts

All new business should be subject to pre-sale credit vetting. New business can be categorised into various risk groups (i.e. negligible / low risk, medium or high risk) and payment terms varied appropriately. It is important to be aware of market trends and solvency risks. This is particularly important if you are over-dependent on one market, which goes through boom and bust cycles.

Information obtained directly from the customer should be supplemented with credit information purchased from business information companies or credit insurers.

Consider the following sources of information to vet new customers:

  • Trade References
  • Bank References
  • Credit Agency Reports – the most useful source, but there is a charge.


Setting Credit Limits

Having vetted the customer and evaluated the evidence, if you decide to allow credit, the next step is to set the credit limit.

If the vetting procedure is lengthy, it may be appropriate to:

  • allow a start-up level of credit for the first order only
  • require cash on delivery
  • obtain a deposit.

Be prepared to vary the credit period, not just for new customers but also one-off contracts and selected customers. Consider offering exclusive terms to valued customers.

Once the terms have been set, they must be adhered to, to ensure that they remain valid. Make sure that your terms are the only terms in existence or, at least, the last set of terms agreed upon. Do not let purchasers impose their own terms and conditions of trading.


The Collection Process

Statements, regular telephone calls, and reminder letters should be used routinely in the collection process and not just when accounts are considered to be overdue.

Do not ignore the option of going to the customer’s premises to collect a cheque from them in person.

Telephone calls should be used at first to establish a rapport. Always speak to the person responsible for payments, find out their payment system and frequency of cheque runs, record an account of conversations and add follow-up actions to your diary.

If a final reminder is required, it should be addressed to a senior person such as the Finance Director, notifying them that the debt is being placed in the hands of a solicitor or collection agent. Companies that fail to pay their clients will damage their credit rating “once it passes to a solicitor”, even if it does not reach a stage where a judgement is recorded.


Checklist for Getting Paid

  • Know who owes you what and when they should pay
  • Pursue debts when they fall due
  • Analyse how much late payers are costing you
  • Adhere rigidly to your credit management policy
  • Send letters detailing overdue accounts
  • Telephone debtors and seek payment
  • Detail debtors’ promises made on phone
  • Remind debtors of broken promises in subsequent letters and calls
  • Engage a debt collection agency before the debt becomes too old.


Written by: Aviné McNally, Assistant Director, Small Firms Association


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