If you’re contracting through your own Limited company, late payments can cause real problems. The best way to mitigate the risk is to have a solid credit control strategy, so in this article we’ll look at how managing your customer credit can help you avoid late payments, reduce bad debts and keep your cashflow healthy.
What is a credit control strategy?
A credit control strategy involves managing your customer credit, monitoring their payment behaviour, and taking appropriate actions to ensure timely payment. For a contractor this process begins before you accept the contract, as you’ll need to check the payment terms and maybe even negotiate changes before you agree to them.
Communication is key
One of the keys to a successful credit control strategy is to ensure everyone knows what’s expected of them. Ensure your contact at each client knows what the agreed payment terms are, and when you expect each invoice to be paid. Where these expectations are not met, work with your client to resolve any issues, both to help them pay the overdue invoice and to ensure timely payment in the future.
Understand your position
You should also have a system in place to track payments, so you know what’s overdue and you can follow up. This can be more complex than you might think – for example if the payment terms are 30 days, you could have been working on a different contract at a different client for weeks before the last payment becomes due.
This becomes even more complex if you often work on several contracts simultaneously, or if some of your clients habitually pay before the due date. You’ll find it much easier to manage your contracting business if you know exactly what has and hasn’t been paid, and if you don’t it can be extremely difficult to chase your invoices.
Heading off late payment problems
Your agreed payment terms are only useful if you can hold your client to them, and you will have to judge for yourself how best to manage your client relationships, and when is the right moment to escalate. Here are some things you can do to head off late payment problems before they start:
Invoice promptly – the clock on your payment terms will often start when the client receives your invoice, rather than when the work is completed. Make sure you invoice right away to avoid delays
Understand your client’s payment process – take the time to get to know your client’s process, so you know where delays might occur, and who to chase if there’s an issue.
Main a strong relationship – if you’re on good terms with your clients and they want to work with you again, they’re more likely to prioritise your payments and issues are less likely.
Be prepared to say no – The more success you have as a contractor, the more choice you will have about who you work with, and you can use this choice to select clients who always pay on time.
By implementing a robust credit control strategy, you can ensure that your business has a steady stream of cashflow, which can help you meet your financial obligations and invest in growth opportunities. So, if you haven't already, it's time to take a closer look at your credit control strategy and make any necessary improvements.
Use automation
FreeAgent’s award-winning accounting software allows you to send recurring invoices automatically, so there’s no chance they’ll be delayed, and you can set up automated reminders to nudge your clients as payments become due. This kind of automated chasing can be very effective, as well as freeing up your time and attention so you can focus on other things.
For more advice on credit control and cashflow management speak to one of our expert accountants on 01296 468 185 or email us at info@orangegenie.com.