Key tax dates and deadlines for 2018/19
It is an inevitable reality that, for anyone earning a livin...
By Lynne Gowers on 21st October 2016
Working for yourself, be it as a sole trader, limited company contractor or small business, offers freedom and flexibility. But while being your own boss is great for your work-life balance, it does have some drawbacks. All business owners will tell you that part of the downside is chasing for overdue payments while maintaining a decent cash flow. In this useful guide to credit control we will look at what you can do to reduce the risk of being paid late and how to handle late-paying clients, including relevant UK legislation and debt recovery procedures.
In a nutshell, the term credit control covers the actions every business takes to keep money flowing. Your cash flow includes the money coming in from clients and going out in expenses and overheads, such as wages and rent.
It stands to reason that if there is more going out than there is coming in, the business will not remain solvent for very long.
As a business owner, having an effective credit control process can save you a load of stress. The first step is knowing how to identify and mitigate the risk of extending credit to your clients.
Forewarned is forearmed. When you take on a new client, do your homework on their financial situation and credit rating. You will be able to get some information from Companies House and you can obtain a more comprehensive financial report from an online credit reference agency, such as Experian.
Once you get this, there are 3 key pieces of information you need to extract:
You should have a contract in place that agrees how you are going to work with your customers. If you are working through an agency they will probably provide you with a legal contract. This should contain clauses detailing the speed and frequency you can expect payment.
Read the processes for timesheets and invoices carefully – if you get it wrong this will inevitably cause a delay which would have been easily avoidable.
Another thing to pay close attention to is the payment terms in the contract as they may be different to what you are used to working to. If this is the case you will need to ensure you have a sufficient credit contingency in place to cover your expenses.
Effective credit control is all about knowing what invoices have been paid and staying on top of what is outstanding. Following the timeline below is a proactive approach to making sure you aren’t left in the lurch.
Invoice issued + 7 days: about a week after issuing the invoice, give the client a quick call or email to confirm receipt
Payment due: if no funds are received, send a statement of account (not a request for payment)
Payment due + 7 days: time to send a reminder letter or email requesting payment
Payment due +7-14 days: place a call to accounts payable to query the reasons why payment has not yet been made
Payment due + 14 days: send a stronger reminder letter or email; warn of late payment charges
Payment due +14 -30 days: maintain regular contact with the client. Keep records of all calls and emails made, you may need this for further action if payment is not forthcoming
Payment due +30 days: consider ceasing to supply services to the client
Should all else fail, there is legislation to fall back on should your client persist in withholding payment. The Late Payment of Commercial Debts (Interest) Act 1998 and the Late Payment of Commercial Debts Regulations 2002 give creditors the legal right to charge interest and fixed late payment costs on any overdue invoice. The rates are as follows:
£ 0.01 – £999.99 – £40
£1,000 – £1,999.99 – £70
£10,000 + – £100
If you still have no joy, you might not have a choice in instigating debt recovery action. There are 3 ways you can do this:
Get the feeling your client may be in financial trouble? Here are some tell-tale signs:
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