Protecting Your Cashflow: A Comprehensive Guide to Credit Management

Protecting Your Cashflow: A Comprehensive Guide to Credit Management

9 July 2023

Have you ever struggled to receive payment from a customer for an overdue invoice? In the world of business, the struggle to receive payment from customers for overdue debts is a common challenge. It can be incredibly frustrating, having to make countless phone calls, send numerous reminder emails, and even threaten legal action, all to no avail. This issue is not unique to you; many business owners and creditors have experienced difficulty collecting payments on time, or even at all.

The problem of late payments can quickly escalate from a minor inconvenience to a major issue, especially when dealing with late payee consumers. It’s crucial to remember that when someone is struggling to make a payment, they may owe money elsewhere too, meaning you’re likely not the only one trying to get paid. Therefore, taking prompt action is critical to success.

According to the Household Economic Survey, the number of New Zealanders with negative net wealth is both large and growing. You are not alone in having to chase customers or clients who owe you money. In fact, many business owners and creditors have experienced difficulty collecting payments on time, or even at all. The sooner you can get payments, the better and it’s important to remember that many times when someone is struggling to make a payment they may owe money elsewhere too. This means you’re likely not the only one who might be struggling to get paid so taking prompt action is critical to success.

Running a business is challenging enough without the added stress of chasing down clients for payments. When unpaid invoices begin to pile up, they can significantly impact your cash flow, potentially leading to you becoming a late payee to your creditors. Unfortunately, most businesses don’t pay attention to their cash flow until a problem arises.

The constant hounding of people for money they owe you can be incredibly stressful, damaging both business and personal relationships, and putting a strain on your finances and stability. However, there is a solution to these common problems that cause a lot of stress.

In this comprehensive guide, we will walk you through how to set up a system that will protect your cash flow from late payees, making debt collection the effective last resort.

Credit Management is the Solution

While it’s easy to get caught up in thinking about things like “secret” methods or persuasive speeches when it comes to debt collection, sometimes it’s more beneficial to take a step back and look at the bigger picture of what might be causing the problem in the first place.

The best system that can protect your cash flow and ensure you get paid on time is called Credit Management. The principles of Credit Management apply to every business, now matter what size. Every large business has a specialised person or even a whole department in charge of Credit Management.

Regardless of the size of your business, a well-established Credit Management Process will guard your business for years to come.

Understanding Credit Management

When it comes to debt collection, it’s easy to get caught up in thinking about persuasive speeches or “secret” methods. However, it’s often more beneficial to take a step back and look at the bigger picture of what might be causing the problem in the first place.

The system that can protect your cash flow and ensure you get paid on time is called Credit Management. Every large business has a specialized person or even a whole department in charge of Credit Management. Regardless of the size of your business, a well-established Credit Management Process will safeguard your business for years to come.

Credit Management is a key business process that includes reviewing, analyzing, and setting the credit and payment terms for a business. In the world of professional services and business-to-business (B2B) sales, credit is often extended to cover the cost of goods and services with payment to be made at the time of delivery or at a later date.

The Key Elements:

Credit Management is directly related to processes that cover these five areas:

  1. Establishing Terms and Conditions of payment for your business (including credit policy) Your Terms and Conditions is an agreement between you and your customer that outlines the ground rules to ensure that you will get paid for your services. This document should be easy to understand and clearly state the expectations of both parties involved. By having this agreement in place, you can avoid any misunderstandings or disputes down the road.

  2. Establish a Credit Policy Developing a clear and consistent credit policy can help to minimize the risk of non-payment. The policy should set out the criteria for extending credit, the terms and conditions of credit, and the process for managing and collecting debts. Everyone in your business should have a clear understanding of the Credit Policy so credit is not extended to a customer that may present a risk to the business by being unable or unwilling to pay.

  3. Approving new customers and offering custom payment terms if needed While onboarding a new customer is exciting, (especially when it comes to professional services, trade, import, and manufacturing). Often you will have to grant credit to your customers. By delivering products or providing services before being paid, you are essentially giving them a loan that they will need to repay over time. While this is common practice and a great way to build a relationship with your customers, it presents a credit risk for your business.

  4. Minimize your Credit Risk by ensuring the creditworthiness of your customers Before extending credit to a customer, it’s important to check their credit history and financial stability to assess the risk of non-payment. This can be done through various means, including credit reference agencies, bank references, and trade references.

  5. Prompt Invoicing and Reconciliation Accurate invoicing and payment tracking is key to effective credit management. This includes setting clear payment terms, sending invoices promptly, and tracking payments to ensure they are received on time.

  6. Recovering payments Having a robust process set in place makes payment collection an easy task – eliminating any tiring and time-consuming chase for payments owed.

  7. Monitoring cashflow Did you know that the vast majority of business failures and liquidations occur because customers fail to pay their invoices on time? Customers that are slow paying invoices impact your cashflow directly. That’s why monitoring cash flow, credit, and debt management are essential to successfully running a business. If customers are constantly defaulting on their payments, it can ruin the company’s chances of being approved for loans or other forms of credit in the future.

In simple terms, Credit Management is your company’s plan to reduce the risk of late or missed payments from customers. This could involve setting up more robust credit control procedures or offering incentives for customers to pay on time. By proactively managing your company’s credit, you can help protect your business from financial hardship.

Importance of Credit Management for Businesses of Any Size

Even if you started a business yesterday, you want to get paid for your products and services. Therefore, you have to have some form of Credit Management system in order to receive money. While a handshake can be your Credit Management system for a short while, sooner or later you will discover that it’s not enough. Instead of being burned and out of pocket, we recommend taking a moment to understand why Credit Management is important for businesses of any size.

Credit Management is important for businesses for a number of reasons. Here are a few key reasons why Credit Management is important for businesses:

  1. Financial stability A Credit Management system can help your business to better understand and manage its financial situation, which can help you to achieve financial stability and avoid over-extending yourself financially.

  2. Access to credit A well set-up Credit Management process can help your business to maintain a good credit rating, which can be essential for securing financing and obtaining favorable terms on loans. A good credit rating can make it easier for your business to access the credit it needs to operate and grow.

  3. Lower interest rates By maintaining a good credit rating, your business may be able to get lower interest rates on loans, which can save you money over the long term.

  4. Financial planning Credit Management is an important part of financial planning and canhelp you to achieve your financial goals and maintain financial stability.

  5. Avoiding fraud Robust Credit Management practices can help prevent fraud. These can include the implementing of proper authorization processes for new accounts, monitoring accounts for suspicious activity, and ensuring the security of sensitive information. By implementing and following good Credit Management practices, organizations can reduce the risk of fraud and improve the overall security of their financial systems.

In essence, Credit Management is an essential part of business financial planning and can help you to achieve your business financial goals and maintain financial stability.

The Benefits of Credit Management

Credit Management provides business owners with a clear picture of their company’s finances, which helps them make informed decisions about credit risks and opportunities. By understanding their current financial situation, businesses can avoid taking on unnecessary credit risk and can instead focus on opportunities that are more likely to be successful.

Here are some additional advantages of Credit Management:

Better decision making and risk management: If you and your team fully understand the credit management process, it is easier to make sound decisions and minimize the risk associated with giving credit to a customer.

Cash flow protection: A positive cash flow is vital to the success of your business. You need to make sure that the money coming in (inflows) always exceeds the money going out (outflows). This will ensure that you can pay your bills and employees on time, and avoid any unwanted penalties or late fees.

Enhanced credit rating and reputation: As your cash flow improves, so too will your credit rating and your reputation. Suppliers always prefer to deal with customers who can pay on time.

Increased customer Satisfaction and Loyalty: By improving your relationship with your suppliers, you will be able to gain better access to products and materials and also gain access to better wholesale rates. Your customers will also benefit from this.

Decreased risk of Bad Debts and Defaults: Being able to detect late payments early on and take action to prevent them from turning into bad debts will reduce the chances of your business being negatively impacted by a default.

Increasing the amount of capital available to your business: By managing your credit effectively, you can increase the amount of capital available to your business.

Quicker and more thorough debt recovery: An effective credit management system can help you recover debts more quickly and thoroughly.

Assisting in budget preparation: Credit management can assist you in planning and performance analysis.

Better relationships with your suppliers and lenders: These relationships can support your ambitions for business expansion.

Increase the overall value of your business: Whether you are looking to sell your business or just want to explore finance options, everyone prefers a well-managed business with a well-managed debtors ledger, and the value of your business will reflect this.

The Optimal Set-Up for a Credit Management System

An effective Credit Management system is an ongoing, proactive process of identifying risks, evaluating their potential for loss, and strategically guarding against the risks of extending credit. Every business needs to have a Credit Manager in place. For a small business, this can be one more hat the business owner has to wear. Or sometimes, it can be easier to seek the assistance of a specialist credit management company like New Zealand Business Tools, to assist with some or all of the credit management process.

By continuously identifying and assessing risks, Credit Managers can help protect against potential losses and safeguard the creditworthiness of their organization. A Credit Manager is responsible for overseeing the credit-related activities of a business or organization. Some of the specific duties of a Credit Manager might include:

  1. Establishing and implementing credit policies: Credit managers may be responsible for developing and implementing policies and procedures related to credit, including how credit is granted, the terms of credit agreements, and how to handle default or late payment.
  2. Assessing credit risk: Credit managers are responsible for evaluating the creditworthiness of potential customers or clients and determining the level of risk associated with extending credit to them. This can include setting appropriate payment terms, setting appropriate credit limits, and ensuring that sufficient security is obtained to minimize the risk in the event of a default.
  3. Monitoring credit accounts: Credit managers may be responsible for monitoring the credit accounts of the business or organization, including tracking payments and identifying any potential issues or problems as quickly as possible.
  4. Negotiating credit terms: Credit managers may be responsible for negotiating credit terms with suppliers or other businesses, including the terms of payment, the length of credit, and the interest rate.
  5. Maintaining records: Credit managers may be responsible for maintaining accurate and up-to-date records of credit transactions, including credit applications, credit agreements, and payment histories.

Overall, the role of a Credit Manager is to oversee and manage the credit-related activities of a business or organization, in order to ensure that credit is used responsibly and in a way that supports the financial stability and success of the business.

NZ Business Tools: Your Partner in Effective Credit Management

We understand that all of this can be a bit overwhelming, especially when you’re still chasing down payments. That’s where NZBT comes in – we’re the market leader in helping businesses across a wide range of industries with credit control, debt resolution, terms & conditions of business, and privacy compliance.

We can help you set up a Credit Management system relevant to the size of your business and your type of industry. You can be sure that your business is in good hands with us. Did you know that correctly worded Terms and Conditions can solve over 80% of late payee issues? Did you know your lawyer is often not specialist enough to help with Terms & Conditions? Did you know that once you have established the T&Cs for your business, you can use them on an ongoing basis for years. The Terms and Conditions for your business are one of the best investments you can make. As we often say to our customers “Pay for it now or pay for it later”

Through years of experience within the industry, NZBT has developed a basic Credit Management system that works for businesses of different types, which includes:

  1. Having an established Credit Policy in place
  2. Having Robust, and legally compliant Terms of Trade that reflect what your business does
  3. Ensure that step 1 for any new customer includes getting your Terms of Trade accepted
  4. Evaluate each new customer’s credit risk
  5. Issue invoices promptly and regularly
  6. Itemize your invoices so if anything is disputed it can be limited
  7. Have a disciplined cash flow management process and don’t be afraid to escalate overdue invoices when required
  8. Don’t be afraid to escalate if you have to
  9. Know what to do if you have to escalate

We understand the challenges and difficulties of running a business during these trying times, and one of the last things you need is to waste your time chasing after payments that are rightfully yours. Let us take care of that for you so you can focus on what you do best: running your business and providing excellent service or products to your customers.

Bad cash flow is the number one reason businesses fail. Effective Credit Management can help you avoid this. We offer all the know-how and resources you need on credit control and debt collection to protect your business from bad debts and disputes – while keeping diplomacy with your customers.

You can rest easy, knowing that your business is shored-up, possibly without the need for expensive insurance. NZ Business Tools offer services such as:

Credit Policy Writing: Know whom to extend credit to, set payment terms and limits, and procedures to handle arrears – to keep a positive bank balance or take on bigger projects.

Credit Checks and Credit Reporting: Be well informed to make good business decisions and mitigate risk with up-to-date risk profiles of companies you are looking at getting involved with.

Terms & Conditions of Service Writing: Set the right expectations from the start enabling easy resolution of unpaid accounts and disputes, charging for late payments, and indemnity from liabilities.

PPSR/PPSA Registration: We’ll ensure you have valid and legally-compliant registrations to maximize your comeback in the event of your clients’ liquidation or receivership.

Ledger Management: Let us monitor your accounts for early identification of possible problems, and then take preemptive action to avoid the hassle of full debt collection procedures.

Debt Collection/ Recovery: We’ll collect payments for you by approaching your customers in a diplomatic manner to maintain good relationships and get the best outcomes for you.

These are only some of the excellent services we offer to make sure your business is running as smoothly as possible – here at NZBT, it’s our goal to make sure you get paid while maintaining positive relationships with clients!

If you’re curious or would like to learn more, visit our website www.nzbt.co.nz or give us a call at 09-390-2000 and we’ll be happy to answer any questions you may have. We offer a free consultation with one of our regional managers to come and visit your business. They will get to know your company and what specific needs you may have. This is a great way for us to understand where you’re at and how we can best help you move forward.

Get started today!

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