Cracking the credit checking conundrum
For businesses battling with daily cashflow and customer issues, checking their customers’ credit scores can seem like a low priority.
However, it can be a critical factor when a business’s cashflow is tight or it is looking for funds to grow, and there are tools and processes a business and its advisers can put in place to streamline their credit checking operations.
AccountingWEB spoke with Steven Marriott, senior product manager at credit reference agency Experian, to find some common areas where most businesses can improve.
According to Marriott, good business practice is not just a case of credit checking a business when you first start trading with them or are thinking about working with them. It’s about checking existing relationships as well.
“Just because my business has a perfect credit score today, doesn’t mean in 30 days’ time when we do another job together it’ll still have one: it’s about that ongoing maintenance and monitoring,” said Marriott.
“A lot of the time I speak to people and ask the question ‘what would make you credit check a company?’ The answer that usually comes back is ‘if somebody’s slow in paying me’.
While in some cases, slow payment may just be a firm managing their cashflow by hanging onto money for as long as they can, a credit check can reveal early warning signs.
“In many cases of slow payment, if you do a credit check there’s usually something in the accounts you can see,” said Marriott. “Maybe they’ve got poor cashflow, maybe they’ve got poor payment history, or they’ve got a few court actions they’ve picked up recently.
“Credit checking is not a fool-proof system but on many occasions, there are warning signals you can find out about.”
Enhancing the collections process
Part of the growing need for increasing the volume of credit checks done on customers is about giving businesses the ability to prioritise overdue invoices and helping enhance that collections process.
While many credit controllers choose to chase the highest value outstanding invoice first, opt for the oldest overdue or simply start working through from A to Z, there are now products available that allow a business to add its customers to a monitoring system.
Businesses can set parameters to be alerted if a customer’s credit score goes up or down by a certain number of points, or if a credit limit goes up or down by a number of pounds. If a customer picks up a court action, goes into liquidation or administration, then the business will receive an email notification.
Once a business has added all its customers in, the system then acts as almost a virtual credit controller, assessing and monitoring, and ready to report if something negative (or positive) happens.
Focussing your efforts in the right place
Another way in which technology can help with credit control is tools such as Experian’s ‘Ledger Manager’ service, where businesses can upload their sales ledger data from tools such as Sage. The service will then tell you who you should be chasing first when invoices become overdue.
One example used by Marriott is a credit controller working in a busy environment with two invoices outstanding for £10,000. Which one should you chase first?
“Ledger Manager tells you the credit score, limit and rating of the business,” said Marriott, “and identifies the company most at risk of not paying (if they’re at high risk of defaulting, have a recent court action against them etc). So you should probably chase this one before the company with the good rating. Just so you can make sure you’re focussing your efforts in the right place.”
Experian Business Assist can help you to make safer decisions about who your business works with so you can manage risk and improve cash flow. Get your free trial of UK Business Credit Reports to credit check any UK business or speak to one of their advisors to see how they can assist your business today.