How's your credit control policy?
I hate to be the bearer of bad tidings, but in the course of researching this story, one hard fact seemed to stand out above the rest. 2010 will be a tough year on the credit front for many New Zealand businesses.
A chat with credit bureau Veda Advantage managing director John Roberts was particularly revealing.
As he points out, his company is in the unique position of seeing the reality of the tough economic times actually work through the lives of consumers and businesses. The company that provides “insights into more than 16.5 million credit active individuals and 4.4 million companies and businesses” has a pretty good handle on the creditworthy status of this nation’s enterprises and their masters.
“Our data shows that while consumers are starting to stabilise, businesses are still weathering the recession storm. In our experience businesses lag 12 to 18 months behind consumers – so we are predicting a tough year for business in 2010,” says Roberts.
There has been a sharp decline in the demand for credit and an increase in defaults across the board, he says. “The most worrying part is the defaults – up 38 percent year on year.
“We would expect to see more business failures this year. We’re aware that commentators see the worst time for businesses coming in March and are predicting improvements in outlook from then.”
Of course, an improving economy can be a double-edged sword. Joe Nel, general manager New Zealand for Baycorp, the firm with more than 50 years experience in the debt collection industry, says that with limited capital available in an upturn, firms revert to borrowing funds again, credit gets extended, perhaps in goods and services, and complacency and old habits return. “Problems can actually get bigger as things get better. Firms must constantly stay focused on their debt management, and there is definitely no room for complacency.”
Of course, calling in the debt collectors is not something you want to do very often – and having a living, working credit control policy goes a long way towards preventing that call to a debt collection agency.
Baycorp’s Joe Nel is concerned that firms don’t treat their credit control policy as a living document. “In the chase for sales in this current environment, people tend to focus too much on making the sale and credit control procedures can end up in the bottom drawer.”
Is it any surprise then that research from Veda Advantage reveals that 80 percent of New Zealand’s small and medium sized enterprises do not check debtors before advancing credit?
This, says Roberts, strikes at the very heart of a company’s balance sheet, and he finds it staggering.
“Thousands of New Zealand companies still rely on personal relationships, connections and good luck to give them some confidence that a customer will pay. This is not best business practice, nor does it mitigate risk.
“We urge managers and directors to ask themselves why they would allow their business to advance credit to a customer when it has no idea whether that customer can pay? The banks wouldn’t do it, so why should you?”
Roberts wonders if it’s the Kiwi “she’ll be right” attitude that’s getting businesses into trouble, and warns that even the guy you’ve been doing business with for years can let you down. “My philosophy is that if they shake your hand and look you in the eye, you know you have a problem.”
“A major trap is not managing risk and living in the false belief that New Zealand is a small country with a small population where people know each other,” he adds. “We are now a country with 4.3 million people and our business owners must adopt 21st century, first-world practices to manage risk. By managing credit risk, companies will keep a tighter rein on a significant part of their debt profile.”
Golden rules
The key to effective debt management is well summed up by Catriona Knapp, principal – business growth at accounting firm WHK. It’s about focus, time and communication. Her Golden Rules include:
• Consider credit limits (perhaps vary these for long standing customers versus new customers).
• Devote the time to invoicing regularly and following up queries and overdue accounts (i.e. a set time each week).
• Review the debtors ledger weekly. Understand who owes you money and how much they owe. This will drive how much you are willing to supply in future for what price!
• Consider whether pro-actively following up customers before the due date will have a greater impact on receiving payments on time.
• Monitor the performance of each debtor, rather than just the average days it takes debtors to pay.
• Understand how much you need to collect on a monthly basis to pay the bills – this should be your minimum collection target (obviously collecting 100 percent within 30 days is the desired outcome!)
• Remember the wow factor! That is the closer you can provide the invoice to the supply of the goods or service the more likely the customer wow factor is at its highest and therefore the more likely priority will be placed on paying the invoice. The more time that lapses, the more the wow factor is likely to have dissipated.
All the above are great practical steps you can take to stay on top of your debtors. Of course, the secret is also to assess a customer’s ability to pay in the first place – and this is where credit reports can be very handy – and in particular, automated alerts. As the saying goes: ‘To be forewarned is to be forearmed’.
John Roberts points out that there are 2.4 million credit active individuals in this country, and 800,000 companies. His company has credit files on roughly 97 percent. He also explains that more comprehensive information can be obtained on companies, as credit reports on individuals are currently limited to negative data/information only. “It’s our expectation that this will change in the near future – that is, positive credit information will also be posted.”
Roberts also advises firms to trade check their suppliers – are they in good financial condition, because if they’re not it will have a direct impact on your business as well. One example is a contractor who goes belly-up halfway through your building project.
Baycorp’s Joe Nel believes credit checks must be ongoing, and not a one-off event. “If you sell on credit, take into account the level of risk taking your business is faced with, and remember that collecting debt is not a one-size-fits-all procedure.”
Nel says, depending on the industry you’re involved with, personal guarantees may be required as part of your credit policy. “And if a firm’s not prepared to provide that guarantee, then you need to consider what information you need to secure your money or secure your goods.”

In addition to the credit agencies, such as Dun & Bradstreet and Veda Advantage, business owners can also access credit information quickly on the web – some at no charge, others at a small fee per search, says WHK’s Knapp. These include:
• Companies Office
www.companies.govt.nz/pls/web/dbssiten.main. Search all current details, directors and owners involvement in other companies (including historical).
•Bankruptcies, receiverships and liquidations
• PPSR (
www.ppsr.govt.nz/pls/web/dbssiten.main. What securities are registered – are there any patterns in activity?
• Land titles
www.terranet.co.nz/terranet . Useful if you are seeking personal guarantees for substantial purchases – what do they own?
In regard to reference checking, an applicant is unlikely to provide their overdue accounts as references, says Knapp. “However, phoning the references provided may indicate tendencies to stretch credit past the due date. Pre-warned, you can vigorously follow up before, on and after the due date to reinforce your required payment terms.” 
When payments slow
As with all business relationships, good communication is important – no more so than in tough times.
“We all know that slow payment is an indication of cashflow issues and good reason for a business to keep a close eye on the client,” says Roberts. “Veda Advantage provides alert tools to enable businesses to keep a closer eye on a client’s ability to pay. By loading a credit alert on a client’s credit file a business would be notified if a default is loaded on the bureau against the client. Alerts can also be loaded on company directors’ credit files if conditions are met.”
While not an exhaustive list, WHK’s Catriona Knapp offers the following suggestions for dealing with a slow payer:
• As mentioned above, communication is the key. Talk to the customer and be open about the fact that you have noticed that the timing of payments has slipped and try and agree new payment terms.
• Offer payment arrangements – perhaps negotiate a repayment arrangement, such as an automatic payment or direct debit, for the overdue amount on the understanding that future invoices are kept current. (Note – it would be important to agree what ‘current’ means in terms of the timing of payments.)
• Consider whether a prompt payment discount would provide an incentive for them to pay on time. (Note – be aware of the impact on margins that this would have.)
Continue to monitor progress and if necessary ‘stop credit’ until the balance due comes back to an acceptable level.
Baycorp’s Joe Nel believes many people are too scared to phone the client when there’s a slow payment issue – or have a face to face. He recommends driving past clients’ premises to see how the business is doing. And if the debt is getting to be a concern, don’t be afraid to stop credit, or the debt will continue to grow. “If a customer owes you $5000 at 60 days, you might get your money – but at 90 days your chances are significantly less.
“Credit control is not rocket science – get help from experts early. If your credit policy is sound, a credit check should pick up anything untoward.” He also says it’s important not to have all your eggs [read big clients] in one basket, and to spread your debtor risk.
The way forward
With provisional tax due in March, ongoing GST, and tight cashflows in recent weeks, nobody’s expecting the first six months of 2010 to be easy on the debt management front.
Dun & Bradstreet’s trade payments analysis in the December 2009 quarter showed that the recovery in payment terms had stalled (44.6 days, an increase of 0.3 days on the previous quarter) – so we’re not out of the woods yet.
There are some hard lessons to be learnt as we inch our way out of recession. Perhaps the most obvious one is the perennial ‘a sale is not a sale until the money is in the bank’. Your clients, both new and existing, are only as good as their last payment – so absolute vigilance is called for. If a credit check reveals a less than perfect payments history on a customer – putting them on cash payment, up-front, is probably the wisest thing to do.
Glenn Baker is editor of NZBusiness.
10 ways to get paid sooner
www.paytorque.com you’ll find some practical suggestions to deal with late payment problems. The downloadable guide, entitled ’10 ways to get paid sooner’, covers everything from establishing credit accounts to structured communications (before and after due date) and prompt payment incentives.
You’ll particularly like the ‘Smart Money’ tips in the guide, such as:
• Don’t be shy about contacting others in your industry, possibly competitors, to find out about a new customer. They might be coming to you because they are no longer welcome elsewhere! When they give you trade references, check the third and fourth ones first!
• Some companies offer an early payment incentive, but don’t make the opportunity prominent enough. People often forget and then feel disgruntled if they miss out. An email or text reminder before the incentive expires is something most customers will appreciate.


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