Keeping control of credit and debt

Controlling credit is a crucial part of managing every company's cash-flow.
Controlling credit is a crucial part of managing every company's cash-flow.

Family Choice

Food products company Family Choice does offer credit, but there is a formal process that clients must go through and terms are negotiated based on reference checks and their history as a customer, owner Gavin Aleksich says.

In terms of encouraging early payment it uses a process that is more carrot than stick, emphasising the discounts available, he says.

"We try to get them at the other end by offering more competitive pricing and making them aware that it reflects in their payment terms that they're getting an immediate benefit."

Family Choice also takes a proactive approach to outstanding debt management, calling clients soon after the 20th of each month to get information and decide on a reasonable approach to debt collection as well as seeking commitments such as post-dated cheques. 

"You need to get on to these things sooner rather than later, you can’t avoid it and you can’t let things fester.

"We understand that at times businesses can struggle and have issues, but for us it's important that we recover the money and part of that is recognising that tipping a business over doesn’t necessarily help yourself or the business at times."

The best thing a company can do if it is having cash flow issues is to get in contact right away, as payment plans can be set up and allowances made for continuing to supply goods, Aleksich says.

"We are much more forgiving of people who tell us they’re not going to pay because it makes it easier for us to manage our cash flow."

Times 7

Radio frequency identification products company Times 7’s policy with new customers is to seek payment in advance rather than offering credit, CEO Antony Dixon says.

"Terms are definitely not default... If they become a long term customer, like if it was a distributor, we would look at terms."

It can be more difficult when dealing with larger companies who have inflexible payment systems, but compromises can still be made, he says.

"Don’t be afraid to ask for what initially you might feel might not be acceptable. People might and will be prepared to negotiate. Their first response might be 'we must have terms' but you get through to the right person and you might get either payment in advance or 50 per cent in advance."

Some large companies require very long payment terms, but in those instances they are usually reputable businesses so he can go to the bank and apply for debt factoring or trade financing, Dixon says.

Jim Donovan and Isambard

Jim Donovan, founder and principal of business transformation consultancy Isambard, favours a system of rewards and penalties, not just for customers but for salespeople as well.

It's important to make it clear in the sales process and on invoices that settling bills early pays while being late costs, he says.

"At Deltec (telecommunications products company he was director of) our prices were set on payment at 60 days after shipment, but we offered discounts equal to 2 per cent per month for earlier part-payment, e.g. with order, on shipment, and 30 days.

"We charged 10 per cent for late payment plus 2 per cent compound for each subsequent month.

"Our sales team bonuses weren’t paid on orders but on payment: a percentage of gross margin less cost of capital, so the sales team were very focused on getting profitable business, getting paid, and getting paid early."

He also took steps to make the payment process as fast and simple as possible, using US dollars when the US was their primary market currency. 

"Treat your customers with respect and make it easy and attractive for them to pay you sooner rather than later."

Direct debit was also offered with a 10 per cent discount on standard prices and a guarantee that if they debited the wrong amount the customer would receive a big bonus credit on their next invoice. This proved to be popular, with a high level of customer take-up. 

"We also offered reasonably priced pre-paid options, with prices reflecting the use-of-capital savings, but also the higher cost of service, which were compulsory for high risk customers."