In the turbulent economic conditions, small businesses need to police new customers and monitor the performance of existing ones to guard against the risk of bad debt, the Institute of Chartered Accountants in England and Wales (ICAEW) has warned.
According to Clive Lewis, head of SME issues, small firms should invest in new credit check for all customers to ensure they are aware of any potential problems.
"Nobody can hide from the difficult credit situation any longer," he said. "Critical to coping with it is rigorous credit control, and that means having up-to-date credit references.
"While many small businesses are diligent in carrying out credit checks on new clients, the information obtained is only of any use if it is up-to-date," he added.
"In the current credit crunch climate, customers' creditworthiness can change rapidly, so it has never been more important to ensure data on your customers is valid."
The ICAEW offers the following tips on how to monitor the creditworthiness or otherwise of new or potential customers:
- Get regular up-to-date credit information on major customers and periodic updates on smaller accounts
- Make sure the credit limit (which shows how much money is owed by your customer at any one time) is in line with how much you sell to the customer; and ensure you have in place robust internal procedures for dealing with customers who exceed their limit
- Assess your payment terms. Make sure you have agreed when you will receive payments and remind your customers about the payment deadline
- Don't be afraid to chase your customer for payment: waiting politely will not help protect your business or your shareholders
- Remember: a sale is not a sale until you have received payments