Three steps to recovering cash flow from your customers

In manufacturing businesses, the working capital cycle is driven by the credit extended by suppliers to you and the terms you afford your own customers in turn. Keeping the cash looping through this system effectively is what allows businesses to grow. Good credit control practices are key in ensuring that your business’s liquidity is maintained, your working capital cycle is as efficient as possible and ultimately impacts on the profitability of your business. It is something that is even more even more valuable when interest rates are increasing.

There is an ongoing balancing act between driving growth through increased sales with a customer and ensuring that the account payment is kept to terms.


Setting up the account.

Good credit collection procedures start the day the customer first orders with you. It is critical at this point that the credit terms you are providing are communicated clearly and are those set down by your finance department. Often commercial representatives are put under pressure to provide credit terms in excess of your standard trading arrangements. Here, a separation of duties can help both sides of the business to operate effectively, allowing the accounts department make the initial call. A strong customer set-up form and accompanying terms and conditions are the key documentary component here.

Make it easy for customers to keep their records up-to-date.

Frustration can arise where accounts departments don’t have the necessary paperwork to process invoices for payments. While some of this can be a customer’s internal issues, don’t leave “cash on the table” by not having your own house in order.

Ensure all sales transactions are posted and issued on the day of shipment.

Make sure your Debtor statements are up-to-date and issued immediately at month-end.

The best way to collect is to politely but firmly begin reminding as soon as the invoice falls due for payment.

Proof of delivery

Having a system in place that allows you real-time access to signed proof of deliveries from transport companies can really help nip potential payment delays in the bud. Where a customer reports difficulty in finding documentation at their side to process an invoice for payment, you will have all they need to provide them copies immediately.


Relationships are not just for the sales department.

In a small or medium manufacturing company business with customers may take years to develop. Relationships between your customer’s organisation and your own matter at every level and in every department. We have shown that separation of duties is necessary in order to create the “Chinese walls” that make it possible for a salesperson to stay commercially focused. You still need to ensure that the accounts department is pragmatic enough to only make waves when necessary. The judgement necessary to make those decisions is developed by building relationships between your accounts receivable and your customer’s accounts payable departments. Where possible, a telephone call can be the best way to foster this relationship in the first instance. You may have automated reminder emails in place and these can augment but not replace a real collections process.

Unwritten rules can apply. Customers may have more than 1 payment run throughout the month. While the main payment priorities are likely to be set by your customer at a senior level, there is often some leeway for accounts payable to handle the smaller accounts. Good relationships between both companies at accounts level can sometimes be the difference between being on the early pay run and the late run.

Careful centralised record-keeping of contact and conversations with customers through a CRM or ERP system, is really helpful in keeping everyone in your company informed of the current status of the account. Also, being able to refer to earlier promises for payment can create a sense of obligation on the other side to ensure that payment of your account is prioritised.

Communication in your business is crucial

Even very good customers don’t always pay the account as it falls due. However, it is a change in whatever is the ‘norm’ for a customer that can be an indication that there may be difficulties coming. Therefore there needs to be a method of pattern recognition either automatically through the accounts system or through account knowledge that be the “canary in the coalmine”.

A systematic feedback loop between your own commercial and accounts departments allows soft information from the marketplace to feed back to accounts. Have salespeople heard news of mergers and acquisitions, change of company structure, rumours of new or withdrawn contracts? This kind of information can ensure that the right decisions for your business are being made.


Using Best Practice

It is good practice to use the procedures that would be in place by a credit insurance company, whether or not you actually have a policy. It doesn’t make sense to take risks with your businesses beyond what an outside expert company might take unless you have commercial reasons they don’t have access to.

Beyond this, in manufacturing industries, credit insurance policies are often held by larger companies and the provisions of the policies are what drive their collection practices. These credit insurance and ratings agencies communicate with each other and share information about slow payments, which policy holders are obliged to provide to retain cover. A customer’s concern that a slow payment will be reported to a credit agency that will share the data with strategic supply partners, is a highly motivating factor for them in paying you on time.

What is best practice?

  1. Accounts are only opened with a well-crafted and signed set-up form.
  2. Credit limits granted only with strong existing credit ratings by a recognised agency or a strong trading and payment history over at least six months. The credit limit amount is governed by strict rules.
  3. Delays in payment beyond 30 days of falling due necessitate all deliveries cease.
  4. Reports of payment beyond that time are necessarily reported to the agency.
  5. Some credit insurers insist accounts are sent to collections agencies after a certain point.

Where point 2 causes issues, for example with a newly formed company, the sensible thing to do is to trade on a pro-forma basis initially. Many customers expect this and it can help reduce your business’s overall credit risk.

Withholding Further Deliveries – not to be taken lightly

For an SME, purposefully preventing further deliveries to a customer while an accounts issue is dealt with can be very serious and is something to use when regular channels have been exhausted. In today’s world of ‘just in time’ manufacturing, non-delivery can hold up or even stop production and cause real long term damage to a relationship. On the other hand, you can unnecessarily jeopardise your own business. Here is where having close relationships at various levels of the two organisations can pay off and help determine how best to manage the issue. Is there a genuine reason for delayed payment? Can a part delivery be made to buy time?

Collection Agencies

Where a customer is not likely to bring repeat business and non-payment has gone beyond your usual terms, do not be afraid to use the services of a debt collection company. A specialist, professional credit agency provides a service that operates on a commission-type basis. So while there will be a cost associated with the use of this service, often a single letter from such an organisation will yield results, you would not see. This is because of the same reporting mechanism referred to earlier. Payout of a claim like this can have an immediate impact on the debtor’s wider business as many credit insurers withdraw all over in the event of a report of a successful claim.

These collections agencies will often charge the debtor costs and interest (as laid out in your T&Cs – see step 1 above!) that actually cover the costs for their services and therefore can be close to cost-neutral for you to use.

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