Insight - Crunch time for credit

There is nothing like an economic downturn for encouraging customers to delay paying their bills. So there is a real danger that the work of many companies, along with that of the government’s Better Payment Practice Group, could be blown away by the winds of recession.

This would be a pity. There has been more progress on late payment in the last three years than in the previous three decades. Indeed, there seems to have been something of a sea-change in payment culture under way, according to figures produced by the Credit Management Research Centre at Leeds University from a survey of SMEs.

In the past five years, the number of companies with a written credit policy has risen from 26% to 51%. More companies (80%) now check creditworthiness than before (63%). And more companies (76%) are also prepared to wield the final sanction of withholding supplies compared with only 63% five years ago.

According to Nick Wilson, professor of credit management at Leeds University, more companies are now putting in upfront effort to avoid payment problems later on. “If they get the front-end of it right and spend some time implementing a credit policy, then obviously they can spend less time chasing up debts,” he says. “They can save time by planning more rather than fire-fighting.”

It would be a shame if much of this progress was lost in the coming downturn as tighter cash-flows ripple through into later payments. But there are reasons for thinking that companies will defend at least some of the prompter payment gains.

First, more FDs are promoting credit control. Peter Rowe, director-general of the Institute of Credit Management and one of the original members of the BPPG, says: “Within the group, the most gratifying thing is that everybody has agreed that the best way of improving payment practice is through better credit management.” He points out that the late payment legislation is just one aspect of a raft of changes.

Secondly, although the late payment legislation has had only limited impact so far, there are reasons for thinking it may catch on quicker in the future. Only 8% of SMEs had actually used the legislation, according to CMRC’s latest figures. But a further 9% are thinking of doing so. And next year, the final phase of the legislation becomes active. Then large companies will be able to use it against their peers.

“When that happens, I think the use of interest for late payment could become the norm,” says Rowe. “We may find that many more companies use the legislation simply because that is what everyone is doing. It will become part of the culture.”

But no amount of law can substitute for a clued-up credit manager. According to Rowe, good credit managers win the respect of the sales team. “They want to liaise with the team and get them to understand that a sale is not a sale until the money is in the bank,” he says. “But they also want to maximise profitable sales – for example, by not turning down credit for the sake of it. Good credit managers can sense that a customer is worth dealing with even when there’s a bit of risk in its profile.” In the end, a good old nose for trouble is still often the best defence.