Credit Score your existing customers with a periodical credit review to reduce overdue debt.
Regardless of the number of customers you might have there should be some process in place to credit score customers to evaluate potential risks to your cash flow.
Scheduling a periodical credit review of every existing customer is a good way to ensure you keep the credit score up to date and meaningful.
This evaluation should also include a review of the relevance and currency of signed documentation. For example:
- Terms of trade: are they up to date and has the customer signed the most recent version?
- Contract: have you and / or your customer changed the nature or type of business, and are any contracts up to date and signed by both parties?
- Credit Limit: do you have customer specific credit limits, and if so, is the credit limit set at the right amount for each customer. And are these limits enforced?
- Entities: Has there been any change of directorships, shareholders OR signatories?
- Contact Details: Do you have the right contact details. Has you customer moved, changed P.O.Box. Have key personal changed phone extensions, mobile numbers etc
- Personal Property Securities Register – PPSR: regardless of the nature of your business and / or business relationship a Personal Property Securities Register search during the Credit Review is recommended. As well as checking that any financing statements are current, (it is the responsibility of the secured party to keep the information up to date).
As basic and as simple as it looks, its surprising how quickly details can change. And its too late to discover that your Terms of Trade, Contract or Contact details are out of date after you begin to experience payment problems with a customer.
Fortunately Insolvency Watch can assist with this. A subscription to Insolvency Watch allows to you opt-in to receive daily email summaries that will keep you informed. For example:
- ALL Advertisement of Application for Putting a Company into Liquidation notices
- The appointment of Liquidator and / or receivers
- Bankruptcy and No Asset Procedure notices
- and much much more
Complacency could be your Achilles Heel:
Complacency! You have traded for years with a customer, and they have, with a few exceptions, always paid on time. It is therefore conceivable that you have not up dated your Terms of Trade or other documentation for fear of offending this valued customer. And its quite possible that about 20 percent, or more, of your customers fall into this category.
This complacency could be your Achilles Heel. If your ‘Valued’ customer faces difficulties, and you have not (or ever) conducted a periodical credit review and updated their credit score, then its natural that you may feel obliged to extend credit beyond your normal limits based on the past trading relationship. However, their past habits may not be enough to help them today.
How will you ever know? Can you afford NOT to update the credit score of every customer at least once a year?
As a general rule we often find that approximately 20 percent of customers pay on time, every time, so therefore you might only periodical Credit Review these customers once a year.
Then there is about 60 percent of customers who pay within a reasonably accepted period, requiring the odd hurry up reminder. We suggest a six monthly review, or if a change in the buying pattern emerges. For example, have they suddenly increased the size or order frequency, type of products being ordered, or asked for increased or extended credit.
And finally the 20 percent that no one in business wants. The 20 percent that fail to pay on time. They are frequently sitting in the 60-90 day (plus) column. And are more often than not, not big spenders, and can be problematic for other reasons too – always dispute the invoice, quality of goods, time of delivery etc, or other ways of delaying payment.
You would, or should, be Credit Reviewing these customers every month if not more. Although we question the worth of keeping these customers – if a customer is frequently overdue, and beyond 60 days, get rid of them. They are using you as an interest free bank, while also eating away at your bottom line – not to mention your interest costs.
The cost of maintaining this 20 percent of customers has a much bigger impact in your bottom line that most business owners know, or like to admit. For example:
A net profit margin under 10 percent is quite common for many Small to Medium sized businesses, however for simplicity in this example we will round this up to an even 10 percent – for in every $1000.00 of sales the net profit is $100.
Therefore for every $1000.00 in sales that is not collected, you need to sell $10,000.00 in sales just to break even. No profit, your have been working for nothing!
Remember that this $10,000.00 in sales is just to break even. It does not consider the additional time, costs of phone calls, letters, postage, AND the time taken away from your core business, money-making.
Summary – No one piece of information should be relied upon
A periodical review of your customers to update / review their credit score involves more than just financial position, (which columns they fill of the Aged Trial Balance). It includes your Terms of Trade, Contracts, Contact details, Credit Limits and any Personal Property Securities Register checks and Financing Statements.
Failure to control debtors increases the risk of bad debts. Regular Credit Reviews to update credit scores allow you to stay in touch with reality, and your customer, and therefore make informed decisions about the credit worthiness of each customer. Use the Credit Review as an opportunity to visit the customer/s in the name of good relations, especially the important ones – and aren’t they all important!