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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.
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