I am constantly hearing stories like “we lost €250k because it turned out we were billing the wrong Company” or “We had a €100k insurance claim disallowed because it turned out the entity we were trading with and the entity we had insured were different” this is the type of situation that upsets me so much because it is avoidable.
Credit Terms are equally simple even though they may not be as dramatic as the instances cited above but in his book “Credit Management Handbook” edited by Burt Edwards he states that the cost of late payments to businesses is up to ten times more than the cost of write offs, so getting customers to pay to terms is most important.
The first part of getting paid is to have clear terms that are communicated, enforceable and enforced. Let me explain, but before I do could you do me a favor? To gauge how many people are reading this article, this far, could you send me an email with the words - I read it, comments or suggestions are welcome but not necessary for the purpose of this exercise, now back to the explanation: very often the order is taken and delivery agreed and no payment date agreed. Some say our payment terms are 30 days but 30 days from what? Order? Dispatch? Delivery? Invoice? Receipt of invoice? End of month following invoice? You need to be clear you need to specify and you need to communicate “Thanks for the order, John, we will deliver next Monday morning and can you arrange payment for me next Friday?” “What time will I pick it up?” That is what I mean by clear.
Enforceable – I have seen payment terms printed on invoices “payment due 30 days from invoice date” that is fine and that is clear, however if you are delivering goods to a customer every day – do you expect to receive a cheque every single day for the goods bought on the day 30 days ago? Usually not – in this case most Companies would either pay weekly or monthly – it is up to you to specify, then agree, them deliver.
Enforced means talking to your customer on or before the day payment is due and making sure all your payments are made on the due date; deals are done if for any reason that is not possible. This is one of the ingredients what good credit management is all about and your ability in this area will benefit your reputation as a credit professional.