Rigorous credit control
is essential for survival

Safeguard your business from the risk of bad debt

In the current turbulent economic conditions, it is crucial that businesses police new customers and monitor the performance of existing ones to guard against the risk of bad debt.

Small businesses must be vigilant against the risk of clients defaulting on payment and should perform regular credit checks in the current conditions, the Institute of Chartered Accountants in England and Wales (ICAEW) warns.

According to Clive Lewis, head of SME issues, small firms should invest in new credit checks for all customers to ensure they are aware of any potential problems.

“Nobody can hide from the difficult credit situation any longer,” he said. “Critical to coping with it is rigorous credit control, and that means having up-to-date credit references.

“While many small businesses are diligent in carrying out credit checks on new clients, the information obtained is only of any use if it is up-to-date,” he added.

“In the current credit crunch climate, customers’ creditworthiness can change rapidly, so it has never been more important to ensure data on your customers is valid.”

The ICAEW offers the following tips on how to monitor the creditworthiness or otherwise of new or potential customers:

Get regular up-to-date credit information on major customers and periodic updates on smaller accounts

Make sure the credit limit (which shows how much money is owed by your customer at any one time) is in line with how much you sell to the customer and ensure you have in place robust internal procedures for dealing with customers who exceed their limit

Assess your payment terms. Make sure you have agreed when you will receive payments and remind your customers about the payment deadline

Don’t be afraid to chase your customer for payment, waiting politely will not help protect your business or your shareholders

Remember, a sale is not a sale until you have received payments “Credit information is available online at the touch of a button, so there is no excuse for not being bang up-to-date,” added Lewis. “Avoiding a bad debt can more than justify the cost.”