How Important Is Your Credit Control?
That’s kind of a dumb question really, we all know that credit control and cashflow is vitally important to our businesses, our livelihood and our ability to pay our bills.
However, it is incredible that so many businesses lack even the most basic credit management skills and then no wonder that they have to spend thousands of pounds dealing with disputes, paying lawyers or even losing out totally when their customers go into liquidation.
Perhaps it’s not so surprising, after all there is no business school that you can enrol in and which will tell you what the law of contract expects you to comply with and whilst you may be very good at what you do, you may not be totally conversant with the finer points of contractual law, and this is where many business people learn the hard way. The lessons that we learn in life are the ones that cost us money!
OK so what are the 5 common errors that businesses make?
Right up there at number 1 is:
Failing to find out who you are dealing with
There are 3 main categories of customer that you will deal with
- The Limited Company
- The Partnership
- The Sole Proprietor
Let’s take the Limited Company first of all. If you are dealing with a Limited Company, it is the company itself and not the directors of the company, who owe you the money. A Limited Company is an entity in its own right and can legally enter into contracts. As the name implies, the company has a Limited Liability to its creditors and the liability of the company is limited to its share capital. In lots of cases, the company is set up with one or two £1 shares. The directors of the company are merely employees and have no personal liability for any debt incurred by the company.
Then we have the Partnership. Partners in a Partnership are joint and severally liable for any debts that their business runs up. There is no protection of limited liability and all partners are jointly liable for any debts. If one partner is unable to pay then the debt will fall to the partner who can pay.
Finally, the Sole Proprietor. The Sole Proprietor is an individual business person who is entirely responsible for any debts that their business incurs. Again there is no protection of limited liability.
The Law treats all of these entities quite differently and so it is vitally important that you establish right at the outset, before you supply any goods or services, who is responsible for paying your invoice.
Number 2 on the list is:
Failing to check if your customer is able to pay you
It may come as a surprise to many to learn that UK businesses are the worst payers in the whole of Europe, but sadly that is the case. Many businesses lose out by not carrying out due diligence before they start trading with other businesses. If someone gave you a rucksack and told you that it contained a parachute, would you just check it before you leapt into space? Of course you would! Wouldn’t you?……
Credit checks are relatively cheap these days (currently around £20.00) and so it makes absolute sense, even before you spend time pricing up a job, to check out how long your customer has been in business? Where is their registered office? Do they have any other trading address? what are their accounts looking like? What is their credit rating and credit score? Is there any adverse credit information recorded against them? Who are the directors? Are they involved with any other businesses? Have they been involved with any failed businesses? All of this information is readily available and is kept in strictest confidence. This is information that you NEED TO KNOW before you part with your goods or services.
Many businesses have had a nasty surprise and have only found out after they have supplied their goods and services, that their customer has a poor credit rating, no tangible assets and several County Court Judgments (CCJ’s). If a company has incurred a CCJ then it demonstrates that someone has had to sue them for their money. So why does it often show that a company has quite a lot of CCJ’s? quite simply, because subsequent creditors have not checked them out before doing business with them.
If you are dealing with a Partnership or Sole Proprietor, do you know their home address? This is very important because if they vacate their trading premises, you could be looking for a needle in a stack of needles. Credit searches are available for individuals as well as limited companies but unlike the latter, you need the individuals permission to carry out a search. Why would they object to this if they are asking you for credit? The obvious answer would be that they have something to hide. Consider yourself to be like a Bank, could you walk into a bank and ask for a £5,000 overdraft without them checking you out?
Number 3 on the list:
Failure to supply, or using obsolete terms and conditions
Many businesses do not appreciate how important it is to have a set of contractual terms and conditions drafted. Even more importantly, they don’t understand how to ensure that it is their terms and conditions that bind the contract and not those of their customers. Quite often they will copy someone else’s which are probably out of date or more likely, are totally inappropriate for their business.
Terms and Conditions are the rules under which you are prepared to supply your goods and or services to your customer and it is vitally important that you make your customer aware of your terms before you supply your goods or provide your service. If you do not do so, then you would be entering into a contract under your customer’s terms and conditions. Why would this be so bad? Well, they could have a clause that states that they will not pay you until they have been paid by their customer, who just happens to pay them on 120 days and then they will take a further 120 days to pay you. Could you wait 8 months for payment? Would you want to?
What happens if you have supplied goods and the company goes into liquidation? This is actually a common problem. In such circumstances, you may make a claim to the liquidator for retention of title on the basis that it states on your invoice that ‘title to the goods will not transfer until payment has been received in full’ In such circumstances, not only will you not get paid, but you will not get your goods back either. Do you have such a statement on your invoices? It’s a common mistake and worth checking.
An Invoice is post-contractual i.e. after the fact and as such you cannot imply terms in retrospect. So, any terms printed on to an invoice are not worth the paper that they are printed on.
Your terms and conditions should be properly drafted and presented to your customer together with your price/quotation for the work you will carry out or the goods that you will supply. This should not stop you negotiating with your customer and if you wish to give more favourable terms then any amendment to your standard terms should be set down in writing, before the work begins or the goods are supplied.
Number 4 on the list:
Failing to get a Purchase Order
Failing to get a purchase order or some written authority to carry out the work can often be fatal. There is no excuse with the technology that we have today to not get some kind of signed authority to supply goods or to commence work. This can be in the form of a formal printed Purchase Order, but equally, a fax, email or even a text can suffice. You just need some kind of proof that the work has been authorised. However, even when you obtain a purchase order or written authority, this is where people often make a mistake. A Purchase Order does not bind the contract to your terms and conditions, it is merely known in Law as an invitation to treat. To ensure that the contract is bound by your terms and conditions, you should send a letter of acceptance to your customer, referring to your quotation and terms and conditions, before the works commence or the goods are provided.
Mistake number 5:
Failing to obtain a signed delivery note or satisfaction note
The onus lies with you to prove that the goods that you have supplied or the service that you have provided, has been completed to the satisfaction of your customer and in line with your quotation. Many times we are told that ‘we couldn’t get a delivery note signed because no-one was there’ sorry, not good enough! Would you leave say £1,000 on someone’s door step if there was no-one in? If there is no-one there and they cannot get someone to accept delivery, then you simply do not deliver and you should arrange an alternative delivery date. This is an important clause that should be covered in your terms and conditions. Alternatively, you should only leave unattended deliveries AT YOUR CUSTOMER’S OWN RISK and they should confirm acceptance of delivery under their own risk IN WRITING before goods are left at site.
Similarly, if you are not getting paid on completion of a job, it is vital to get your customer to sign a satisfaction note when you have finished the work. Many disputes arise after the work has been completed and you are no longer on site. If the customer subsequently complains about damage, how do you know that this hasn’t been caused by a third party? If the customer is reluctant to sign a satisfaction note, then this immediately highlights a problem which should be dealt with immediately. Get any dispute in writing, again, your terms and conditions should cover this eventuality.
So there you have the 5 main reasons why businesses lose money or even worse, why they are wondering why they were so busy, and end up going out of business! If you were to read a Liquidator’s report the main cause stated for businesses failing is poor cashflow and bad debts.
OK none of us start up in business to fail but there is no ‘business school’ and most of us learn the hard way. The lessons that we learn in life are the ones that cost us money! So what happens when you fall out with a customer, you end up in Court and you hope that the Judge is on your side right? After all you have done everything right, or have you? The onus of proof of debt lies with you, full stop. Didn’t check who you were dealing with? Your claim is thrown out! Didn’t get delivery notes signed? Your claim is thrown out! Didn’t establish your terms and conditions? Your customer wins and you pay their costs! Customer goes into liquidation? You don’t get paid AND you don’t get your goods back!
All a bit of a nightmare but it doesn’t have to be this way. By employing proper, professional credit management procedures, you can avoid all of these nightmare scenarios and ensure that your business thrives and avoid the pitfalls that befall businesses on a daily basis. But wouldn’t this cost a fortune? Well yes it can do if you had to employ a full time credit controller and had to use solicitors to draft all the documentation that you need, but the good news is that all of these tools are available for you now, no expensive solicitors and easily affordable monthly payments.
So how can we help?
Call Colin now on 0151 229 1071 for a friendly, no obligation chat. We would love to welcome you on board