Credit limits are designed to prevent debt from escalating out of control. Put a credit limit on all customer accounts and then put an automatic ‘stop credit’ on any overdue accounts.

It’s also sensible to train your staff in how to approach a customer who has reached their credit limit so that the account can be settled in an efficient and professional manner.

You could also set up automatic reminders to gently notify customers reaching their credit limits. Many customers, especially those who have multiple employees placing orders, will appreciate these reminders as they may be unaware of how much has been purchased.

Always require a credit application

You can reduce the risk of chasing up an unreliable customer by doing some simple checks before offering credit.

Even if you’re confident that a debtor will ultimately pay up, outstanding balances are a burden that your business should not be forced to carry.

Speed up the cash cycle

Your cash cycle is the time it takes you to receive payment for your product or service. The shorter your cash cycle, the faster cash comes into your business. Some businesses are easy: when you buy a coffee, the café receives the cash immediately. Some industries are harder; if you are contracting you often have to comply with procurement rules, which can have more complicated payment processes.

To speed up the flow of cash you can:

• Switch to cash payments or use shorter credit terms.
• Offer your customers mobile and online payment options. If you’ve just finished a job, delivered a product or completed a service, ask for payment immediately while they are happy.
• If you do invoice, ask for payment in seven days. If you do offer payment the following month, remove any reference to 30, 60, or 90 days overdue. You should just have two amounts; due now and overdue. Don’t let people think they can fill in the boxes to 90 days late.
• Encourage early payment.
• Ask for pre-payments or deposits.

Managing credit

Know exactly how much you’re owed. Accounting software will help you find out exactly how much customers always owe your business.

Along with customer details, you can often set up your invoicing system so that:

• Automated reminders let you know when a customer is late, so you don’t forget.
• You can keep track of customers’ payment histories, giving you more to go on when you are thinking about changing their credit terms.
• You are not at risk of extending them extra credit when they still owe you money.
• You can take fast action if you need to.

Talk to us about the best software for your business.

Clarify your terms of trade

Set up your own terms of trade and double-check they are clear. If your trade terms are confusing or if they open the possibility of late payments, consider firming them up. If you don’t have terms, now’s the time to spell them out. For example:

• Outline when payment is due.
• Document any late payment fees and how they are calculated.
• Define any incentives for early payment.

Be consistent and measure success

Always take action in the same manner regardless of which customer is overdue. Having a defined process and following it consistently is crucial. If you’re having difficulties with a particular customer, aim to resolve issues early because the sooner you chase the debt, the faster you’ll get paid.

Final Thoughts

Strong credit control isn’t about being tough, it’s about being strategic and consistent. By setting clear limits, improving payment systems, and using the right technology, you can keep your cash flow strong and your business secure.

At HD Accountants Pty Ltd, we help small and medium businesses establish effective credit policies and streamline their cash management systems.
Contact us today to discuss how we can help you improve your cash flow and reduce overdue payments.