Credit control - best practice

Are credit control checks too costly, time consuming or just get in the way of doing good business? We take a closer look at the potential dangers of not performing due diligence.

Small to Medium Enterprises (SMEs) idefined as any business with fewer than 250 employees.

The Companies Act 2006, as amended, says a small business has less than 50 employees, turnover of less than £8.2m and a balance sheet total less than £8.2m.

A medium business has less than 250 employees, turnover less than £41m, and a balance sheet total less than £35.2m.

So if your business falls into one of these categories, what are you doing about your credit control evaluations for new customers?

“Credit control stops business”

Naturally, a growing business wants to improve, grow, get more customers and clinch the next deal. But, your new customer then wants credit terms.

Hopefully, you have a credit application form (containing a second copy of your terms of business - a copy of which you should have already given to your potential customer), your new customer has completed the form, signed it and returned it to your accounts office.

Good practice is to evaluate the potential customer, take trade credit references, obtain an agency credit reference, consider a requirement for other guarantors, and finally, you establish a credit limit with the customer.

However, as a growing business, sometimes best practice is left behind in the rush to get the client on-board and start doing business with them. But, not doing your homework first can prove to be a costly omission.

R3, the Association of Business Recovery Professionals, conducted research in the earlier part of 2016 and discovered that around 113,000 businesses were owed money by a business that had entered an insolvency procedure during 2015 - that figure represents an estimated 6% of all UK businesses.

Medium business most at risk

R3’s research also found that 1 in 7 medium sized businesses (51-250 employees) were owed money by a person or a company that had entered a formal insolvency procedure, a not inconsiderable 14%.

Whereas an estimated 4% of large businesses (i.e. 250 employees +) were a creditor in an insolvency procedure during 2015, small business represented between 5% and 7% of such creditors. 5% of sole traders also faced a customer entering into an insolvency procedure.

So why are so many medium sized businesses facing above average levels of insolvent customers?

R3 thinks two key factors play a part in this:

1. Growth drive to find new customers without evaluating their credit worthiness first

2. Lack of controls to monitor their exposure to the potential threat of customer insolvency

Prevention is better than cure

We cannot stress the importance of having your core business systems established. If a customer wants a credit account, then spending a bit of time at the start of the business relationship by conducting the necessary checks will save a lot of angst, and lost revenue, further down the line.

Often, we meet clients who do not know the full name of their creditors. Example:

A business having been owed money, makes a claim as a creditor in an insolvency. However, once the copy invoice arrives, instead of being from Mr Fred Smith, it is actually Fred Smith Limited. Upon further investigation it transpires that this company has actually been dissolved. Result? Mr Smith’s claim is rejected and he has no right to participate in the insolvency.

4. Credit Control Graph
Establish the facts


The most fundamental step is to identify who your new customer is. What is their name? What legal entity do they have (for example a sole trader, a limited liability partnership, a limited company, etc.)? Where is their registered office or principal place of business? What is their trading address?

Implementing a formal credit application process is essential. Whilst paperwork may be time consuming, it could eventually form the basis of court applications or even evidence of your creditor status in the future.

Essentially, establishing a good paper trail will close loop holes that could be exploited by a savvy customer looking to evade payment by whatever means.

Ongoing monitoring

It’s not enough to just do your homework at the outset however. Once a credit account is in place, you need to be observant of your customer’s behaviour. Whilst it’s easy to be persuaded to extend credit terms, you must adopt the tough love approach - if they do not pay on time, they should be put ‘on stop’, with future supplies made on a pro forma basis until the monies owed to you are settled.

Please bear in mind that each time a customer fails to pay, it’s your cash flow that comes under pressure.

To assist with this, Companies House provides a system whereby you can monitor the accounts of an incorporated business. You should keep a track of how many days late a customer pays. Look for the patterns of orders - to invoices - to cash received. Look for deviations from the normal patterns. Keep evaluating and re-evaluating your risk and exposure.

When it’s too late

If a customer falls into an insolvency procedure, you will lose some of the money you are owed, and in some cases, even all of it.

If you fail to do your homework, and/or don’t set your credit terms, or allow customers to exceed credit limits, nor keep an eye on your customer then this is tantamount to you offering your services for free.

Ultimately, if your cash flow is damaged, then your own future could be in jeopardy.

How we can help

We can guide you towards credit control systems, review your Book Debtor ledger, provide a monitoring service as well as guide you towards some basic preventative measures.

We can also give advice on how best to approach the insolvency practitioner if a customer does face an insolvency procedure.

Please speak to Paul Palmer or Jeremy Oddie for further advice..

Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales and authorised and regulated by the Financial Conduct Authority for investment business