Meeting your credit obligations is an essential part of staying afloat as a business, but it's equally as important to ensure that other businesses are also holding up their end of the bargain.
Assess your customers
As customer revenue is the lifeblood of a small business, the impact of a delinquent or non-paying customer can have a significant impact on your cash flow - and if not rectified, could cause your business to fall over. This is why it's essential to assess your customers' level of creditworthiness to determine if they are good credit candidates.
Credit checking your customers will reveal information such as previous defaults, bankruptcies, court judgements and past credit enquiries - all of which will help you make a decision on whether to on-board the customer.
Review your credit policy
Reviewing your credit policy on a regular basis goes hand in hand with assessing your customers' level of risk.
A credit policy sets out the rules for determining who you will provide credit to, how much to provide and how you will monitor that credit once it's been provided.
If your circumstances change, you will need to update your credit policy accordingly. For instance, if you're experiencing some cash flow pressures you may want to shorten your credit terms from 30 days to 20 days. Ensure you communicate these changes in writing to affected parties and wait to receive their response.
Assess your suppliers
It's equally important to evaluate your suppliers' level of risk as your business depends on the quality and punctuality of the goods and services they provide to you. As a result, you need to check if they are legitimate and reliable, and if you believe the price to be adequate for the goods/services rendered. Read more on how to assess supplier risk here.
Stay on top of late payers
Lastly, you should stay on top of late or potentially late payers with the following tips:
- set reminders in your diary five days before your customers' payment is due
- maintain a spreadsheet of all bills and their due dates
- categorise customers by their risk level - e.g. based on their payment history, those who pay consistently late should be classified as high risk, while those who have never missed a deadline should be categorised as a low risk.
- keep an eye on those you have classified as high risk and follow up once payment falls overdue.
- continue to monitor your low and medium risk customers.