Times are all extremely demanding on the economic front and every rupee collected on time from your customer gives you the much-needed liquidity. One of the most decisive ways of ensuring payments on time is by having a clear credit policy for your customers and enforcing the same with the required assertiveness. Clear-Cut credit policy has more benefits than just this though:
• It helps you stay abreast of your client’s financial position and helps in pre-empting bad debts
• It also helps you to treat all your customers on a level-playing ground. You can emphasize that none of your customers are treated unfairly.
Is a credit policy applicable to all?
Remember, a credit policy is not applicable to over-the-counter-payment business models where a client is bound to pay immediately upon receipt of services – Eg. retail, beauty salons, online portals etc. Instead, this applies to businesses like small agencies — advertising and media agencies, video makers, event management unit etc where payment is upon raising invoices after a stipulated period.
The step-by-step approach of putting a Credit-Policy in place:
The following clear steps, if followed in principle and true spirit, will help you keep your business protected from non-payment of dues and stifling liquidity conditions.
• Decide the Payment Terms:
Upon entering into a business relationship ship with a client and agreeing on the scope of work, the next step is to agree on the pricing and subsequently, the payment terms.
Make sure that the payment terms are specific and do not leave any room for ambiguity. – Communicate the payment terms to the customers and get his agreement in writing – Communicate the same to the employees who will be servicing the client – Lay down the choices for the modes of payment available
• Decide the Credit Limit:
Next, decide on the credit limit that will be given to the customer. Make a clear policy on cash vs credit depending on the business’s requirements. – Enumerate the minimum amount of cash that has to be paid at the start of the deal. – And then specify clearly what percentage of the remaining dues will be payable within what period
• Specify guidelines on Invoice Raising:
Make sure it includes the following: – The time within which the invoice will be raised once the ordered goods/services have been supplied. – Be meticulous about including every relevant data like the purchase order number, delivery procedure, details of the goods/services supplied, the amount due and VAT details.
• Specify redressal for non-payment/ bad debts: Outline clearly in your credit policy how you will deal with late payments or no payments. – In case of late payment, mention the amount of penalty that will be payable – In the case of bad or doubtful debts, determine when and what level of action to take, whether this is a simple phone call, legal action or outsourcing to a debt collection agency
• Specify recourse to legal action: Finally, provide for breach of contract in your credit policy. Mention clearly the legal recourse your business will be forced to take in case of non-payment of dues beyond a stipulated time and after regular follow-ups and reminders.