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As with any progressive businesses with growth aspirations, the importance of strong cash flow in Professional Service organisations should not be underestimated. In particular, the two elements of credit control and debt collection play critical roles in maintaining strong cash flow.
This article aims to provide guidance on the processes required for credit control and debt collection within the professional services sector. It can be used as a starting point that organisations can then use to develop a framework for maintaining strong cash flows.
Before professional services organisations can design an effective credit control and debt collection process, they must first understand the different levels of risk arrears within their existing client base. This will require a ‘Risk Analysis’ approach to collections that which will be unique to every organisation.
Once the client base has been categorised by risk profile then the next step is to develop strategies for ‘Preventative Action’ - to limit the quantity of accounts that fall into arrears. And ‘Targeted Actions’ – That ensure the relationship is maintained whilst payments are swiftly collected.
We’ve outlined some possible risks Professional Services organisations may encounter when reviewing their client base and accounts that are in arrears. The list is by no means exhaustive and should be used as a starting point in developing a process.
In the above class of client, the overall risk of non-payment is relatively small. However, given the potentially large nature of the client business and relatively large payment due in relation to a smaller suppliers overall revenue (say 5% of total revenue). When payment is withheld or delayed then the effects could be potentially catastrophic and further compounded where margins are small.
Given the high failure rate of new small businesses, it’s safe to say that they carry a high risk of defaulting on agreed payment terms. It’s unfortunate, but the catch phrase ‘small businesses don’t plan to fail they just fail to plan’ falls true, too often with this category of client.
A good example of this type of organisation being within the ‘Building and Construction’ Industry. This sector has one of the highest rates of Insolvency, which in turn may attract a high risk profile for your organisation.
These clients have historically had an excellent reputation for paying their debts. However your trading terms may not be able to be met owing to timing of the farmers income.
Working for individuals often means dealing with a large volume of clients with relatively low invoice values in relation to an organisations overall revenue as is the case of certain types of Law firms, Accounting and Health Practices. At a macro level you might assign a low level of risk to a client where the invoice exposure makes up less than 1% of Gross Income.
When assigning a risk rating to individuals and corporate clients, it’s worth noting that Banks, Building Societies and Credit Unions have very robust systems in addition they have access to data that allows them to rate and apply a risk pricing ( i.e., Credit Card Interest Rates). These tools are often unavailable to regular businesses when applying trading terms.