UNDERPERFORMING CREDIT CONTROL DEPARTMENT? A CASE STUDY

One reason for clients approaching me is sometimes a very simple one - their customers aren’t paying on time (or at all) and they don’t know why.

Customers rarely pay late without reason and quite often, it is down to the working practices of you as the supplier that are at fault.

This was the challenge faced by a recent client of mine. It’s a reasonable sized business with a turnover of ￡8m+ and has grown very rapidly. However, the emphasis has been on driving sales and typically for many such businesses, the controls and infrastructure to ensure they are paid for those sales hasn’t kept pace. The consequence was that most customers were paying late and, in some cases, debts going back over 2 years had yet to be settled. 

The debt position was getting worse and DSO stood at 43-days, based on 30-day payment terms. Urgent action was therefore needed.

Understanding the main contributory factors meant we could prioritise tackling those areas that were affecting the debt position first. Investigations revealed the following areas of concern:

· Invoicing practices were particularly poor. Invoices were often not sent out on time or were incorrect. Customers were therefore unable or unwilling to pay on time. The volume of disputes raised by customers was increasing and so my client didn’t have time to investigate them all.

· Information provided by the Sales Dept at the point of sale was often incomplete. Sometimes, no written agreement with the customer was obtained. This not only affected the above invoicing practices, but also made it difficult to legally enforce collection of the debt if required.

· Credit control practices. Statements were only occasionally sent out and overdue letters weren’t sent at all. Credit controllers were demotivated and time was often taken up with numerous admin duties, so there was little time (or desire) for meaningful, pro-active credit controlling.

· Credit control processes and policies either didn’t exist or were not fit for purpose. Departmental accountability areas were poorly documented (if at all) and so responsibility lines were blurred. The consequences for non-paying customers were unclear. Reporting – what, when, by and to whom – was ambiguous and more of a “tick-box” exercise, rather than being meaningful and informative.

The cashflow and profit of the business was going backward and a common reason given was that everyone was “too busy” to make the changes that were needed. This is usually a false concept fed by a range of factors, such as poor IT systems, ineffective policies, understaffing and so on. But mainly, it is driven by poor leadership – after all, if leaders aren’t leading effectively, then what are they for?

The top priority was to tackle the problem of being “too busy”. This was more to do with a lack of organisation and planning, where staff would often be asked to move from one fire fight to the next. So, together with the credit manager, we developed credit control timetables of work, which were documented tasks needing to be done at an individual and departmental level. They were created monthly and reviewed weekly, so were dynamic and relevant to the time. They were transparent and shared with the rest of the business. These simple changes allowed credit control staff to organise their day and the credit manager to plan more effectively where resource would be most needed, ahead of time.

The natural consequence of a more organised approach was that other working practices improved rapidly:

· Invoicing was able to be done on time and because it was planned in advance, there were less errors;

· Time was set aside for credit controllers to call customers for money owed. This helped identify any issues early on and allowed credit controllers to build relationships with their customers.

As a result, within 2 months, cashflow increased by ￡330k and the DSO was reduced to 35 days.

Over the coming months, the next steps are to deliver further culture change through developing an effective credit policy and robust process controls, along with improvements to the reporting. These steps will develop a more consistent approach to the ways of working, build cohesiveness between departments and protect the risks of the business.