Accounts Receivable: Give Credit Only Where It’s Due

First let’s ask, does your firm have a credit policy? An amazing number of professional services firms don’t have one, or if they do it’s relatively haphazard. It’s essential that your firm has a credit policy and that it’s known and understood by every member of your team.

Your credit policy needs to be in writing, covering every detail of your financial relationships with clients. These are some of the contents it should have to be truly effective in protecting your firm from loss:

1. An application form to be completed by every new client,

2. A method for setting allowable levels of credit for clients,

3. A statement of who in your firm is allowed to extend credit to clients,

4. A procedure for collection of outstanding amounts,

  5. A system that monitors clients’ accounts and alerts you when existing credit terms have been exceeded.

Most professional services firms provide their services without first receiving any advance payment from their clients. You may not see it as extending credit, but this is exactly the same as giving credit to clients and must be seen as such.

Clients should understand that the credit you give them is a courtesy extended by your firm and not something that they can take for granted. Send a welcoming letter to all new clients and in it tell them the details of your credit policy. Invite them to contact you directly if they have any questions.

In credit management the paperwork is important. Be sure your client details are up to date at all times. This includes business address, home address, all telephone contact numbers, and any other information that may be needed if they fail to pay your account within a reasonable period of time.

It’s also possible where potentially large amounts are involved to perform a commercial credit check on a client. This should include both a personal credit check and a credit check on the business just to be sure you don’t miss out on some critical information. These credit checks are usually kept confidential and your client won’t be aware that you’ve had them done.

If your firm has an especially large number of client you may want to grade them according to risk. “A” could be risk-free, “B” only a moderate risk and “C” one to watch carefully. Clients can be moved up and down the ratings according to the various factors that should be incorporated into your credit policy — whether the company is profitable or unprofitable, whether the personal credit report is satisfactory or not, and so forth.

Credit experts estimate that if customers of any business don’t pay their account within 60-120 days the costs of administration and collection can easily be 10% of the amount that’s outstanding. This is just the same as giving your client an interest-free loan so don’t be hesitant when it comes to collection, particularly if it’s a client with a “B” or “C” rating in your credit system.

In the field of professional service credit is only a means of supporting your firm’s level of business. It shouldn’t be seen as a means of attracting new clients or growing the revenues from existing clients. You have to cover all your overheads, from rent to electricity and the costs of employing your team members, from your cash flow. An overextension of credit can affect your ability to pay the bills.

This is why it’s important to have a credit policy and to be sure your clients understand it from the beginning of your relationship. You need to maintain complete control at all times by monitoring the financial aspects of your client relationships and being firm and consistent in administering your firm’s credit policy.

Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.