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One of the biggest issues many small businesses will face, both now and post-lockdown, is poor cashflow. This is an age-old problem which was present before and will continue to be long after the effects of the pandemic are a distant memory.

Reducing the risk you take when dealing with new customers can play a big part in managing your cashflow. You need both visibility and control; to know which clients owe you money so that you can chase payment and also to have control over the amount of credit you allow new customers.

Customer credit limits

Using customer credit limits is one way to manage your cashflow and reduce your exposure to bad debts.

Once you decide to take on a new customer and offer them credit terms, ensure you record this within your customer record. Once set, these credit limits should be reviewed regularly and can be tightened, for example, for those who consistently pay late. 

Check how much is outstanding on a customer account before completing a sale, so that you can make a considered decision on whether it is appropriate to continue with the sale at that time, or wait until you have received payment of at least some of the amount you are owed.

Real time decisions

To help you with your decision-making in these circumstances, Xero has recently launched a new phase of customer credit limits, called credit alerts.  When creating a new invoice for a contact with a credit limit, you will now see a banner displayed when the contact has reached their credit limit. As line items are added or removed, the banner will display the credit available in real time. This feature is only available in the ’new invoicing’ format in Xero but is a great tool for providing the most up-to-date information on your customers’ credit and reducing you risk.

How to ensure you get paid on time

There are a number of things you can do to help you get paid on time.

1. Have a credit control policy in place and keep to it.
2. Apply prompt payment discounts or apply late payment fees.
3. Ensure that your invoices show the methods of payments you offer, include your bank account number, or a link so that customers can pay online.
4. Offer an online payment service via a third party which links directly with your software.
5. Check you have used the legal name of the business, which may differ from the trading name.
6. If there is an accounts payable department, make sure they get a copy of the invoice.
7. If you received a purchase order, make sure to quote this on your invoice.

Credit control tips

Not many small businesses have credit control procedures in place. Chasing payments can be painful and time consuming, however formal procedures and a consistent approach can help improve your cashflow.

Techniques you can use include:

1. Run credit checks before accepting new customers.
2. If the credit score is low, consider accepting them, but with shorter payment terms to encourage them to pay faster.
3. Ensure that invoices contain all the information required by each customer.
4. Know when in the month customers do their payment runs, and who to talk to about getting paid.
5. If you decide to include late payment fees or interest in your terms and conditions, make sure you charge them.
6. Do not delay in issuing invoices. Immediately after delivering the product or service is the best time.
7. Review outstanding invoices regularly and make a plan to deal with those past their due date…and stick to it!
8. Talk to your customers and consider offering different payment methods, giving early payment incentives or changing credit terms.
9. As soon as the due date is passed send an invoice reminder – an email reminder is often sufficient to encourage customers to pay. You can even set this up to be done automatically in Xero.
10. If this does not work, follow up with a phone call.
11. Use the notes function in Xero to log any contact made; reminders sent from Xero will appear in the notes.
12. Make sure you say thank you when a customer pays, whether the payment is on time or not. These positive messages can strengthen relationships and increase the speed of future payments.

For more information on how cloud accoutning packages could support your business, contact Rhinannon Hooper at rhiannon.hooper@hazlewoods.co.uk or 01242 680000.