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Credit Control 2.0 The ultimate guide to getting paid faster

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Hi there!

My name is Steven Renwick, founder & CEO of Satago. For those of you who haven’t heard about Satago before, it’s one of the FinTech (Financial Technology) companies that is currently turning the financial industry upside down. Many FinTech businesses were started to take on the big banks and investment firms but credit control is an industry that hasn’t seen much disrupGon yet. In order to eradicate the culture of late payment of invoices for small and medium sized enterprises, Satago’s young entrepreneurs developed a powerful CRM soJware plaKorm to reduce the headache of chasing customers for payment. On this journey, we’ve received many quesGons from our users about best pracGce for credit control and have created this document to summarise the main points on how to improve your debtor management. We picked the brains of our credit control partners and asked our users what works best for them.

So why do we call it Credit Control 2.0?

Credit control 2.0 is a clever forward-thinking approach to give you a whole new perspecGve on credit control. We took the best elements of human interacGons and technology to create Satago. This document gives you our best pracGce advice to get you started, helping you to improve your debtor management process in a Gmelier fashion and giving you more Gme to do what you do best. That is, running your business. You should see immediate results as our users have been geSng paid up to 23 days faster. You don’t need to do the chasing yourself, nor do you need to outsource it. You can literally sit back and let Satago do 80% of what you do manually today.

I hope the following pages will show you that these days, it’s all about working smarter, not harder!

Kind regards,

Steven Renwick

Founder & CEO

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Credit control vocabulary 4 The underes=mated importance of credit control 6 Why companies don’t pay on =me 7 Automa=on – The secret weapon of efficiency 9 The ul=mate credit control approach 10 Do I need credit control staff? 17

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Credit control vocabulary

Accounts Receivable

Payments outstanding for goods or services provided on trade credits (payment terms).

Average Debtor Days (ADD)

Indicator of how many days on average your invoices are outstanding.

County Court Judgments (CCJ)

Formal court decision that a business owes a creditor money. CCJs are a drasGc way of geSng your money back, therefore, court acGon should only be taken as a last resort.

Credit Check

An check of the indebtedness of your exisGng or future clients to determine the likelihood of your clients fulfilling their financial obligaGons.

Credit Limit

A credit limit is the maximum amount of credit that a financial insGtuGon or lender will extend to a debtor for a parGcular line of credit.

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Credit Rating

A credit raGng is an evaluaGon of the credit worthiness of a debtor, especially a company.

Days Beyond Terms (DBT)

Indicator of how many days payments are outstanding that are beyond the agreed payment terms.

Invoice Factoring

A financial transacGon to minimise the risk exposure of outstanding invoices. Businesses sell their accounts receivable to a third party at a discount.

Working Capital (WC) Current Assets – Current Liabilities

An indicator of your operaGonal liquidity. In other words, it is the cash availability for your daily operaGons. Working capital should always be posiGve as negaGve working capital highlights severe short-term liquidity problems.

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The underes=mated importance of credit control

Many businesses do not acGvely manage their credit control nor do they build an effecGve credit control team. As a priority, businesses would rather improve their sales and turnover than look at their accounts receivable. What many companies ignore at their peril is that large increases in turnover cannot save them from the inevitable demise of not geSng paid. If your customers do not pay for your goods or services, your business will not survive. A posiGve cash flow is the most important financial metric to ensure that you stay in business. For smaller businesses, this is especially important as they rely heavily on working capital but neglect the fact that their accounts receivable are one of their biggest assets. For some businesses, accounts receivable can make up as much as 37% of their assets.

Warning signs of increasing outstanding debt are overlooked as many companies ignore late paying customers. Let’s face it, no one likes to remind their customers that they have not paid their invoices. It might be that you, like many others, feel uncomfortable reminding your customers. It could also be due to a lack of resources where business generaGng departments get the greatest share of employees and funds. Approximately 85% of SMEs complain about late paying customers and up to 2,000 companies go out of business each year due to late payment of invoices. At Satago, we think it’s Gme to come up with an effecGve credit control process that is central to the financial viability of every company. The harsh truth is that people don’t pay you unless you remind them. With this in mind, let’s streamline your debtor management.

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Why companies don’t pay on =me

There are many reasons why customers delay their payment. Here are some of the most common ones:

Misunderstanding

One major reason, that we hear repeatedly, is that your customers are confused about your payment terms. This happens if your payment terms are not stated properly in your T&Cs or, if they are not specified in the footer of your invoices. Your customers might believe that they are paying within your terms when in fact their payment is long overdue. OJen, there is also confusion about where payments should be made.

Clients find excuses as there are no consequences

Unfortunately, this kind of late payer is incredibly common. There are, and always will be, people who try to squeeze as much for themselves without considering others. This type of customer normally comes up with unsubstanGated excuses for delaying payments. They do this to improve their cash posiGon as there are no consequences. They know that very few companies charge or enforce late payment fees or even revert to the courts to get paid.

People assumed they have paid an invoice

This has probably happened to most of us before. These customers will usually pay you very quickly once you send them a reminder. In most instances, you can expect a genuine apology for the late payment and it is unlikely that it will happen again.

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Your customer’s accounting department is disorganised

Some companies have serious problems with their accounGng department. We have come across several companies whose accountants/bookkeepers were so disorganised that they were unable to stay on top of their accounts payables. This type of late payer is very frustraGng but the best approach to follow is to contact them regularly and bring your unpaid invoices to their agenGon.

Financial difficulties

Some companies have serious financial difficulGes and while this kind of late payer is difficult to handle, your only course of acGon is to try to agree a schedule of payments over an extended period. Of course, your best course of acGon is to avoid doing business with companies experiencing financial difficulGes.

For most of those excuses, there is not much to worry about, as those are rather 'favourable evils' of late payments. As long as you have a proper credit control system in place, which ensures that you stay on top of your accounts receivable, you will be beger prepared to face most eventualiGes. Dealing with customers who deliberately hold back payments, however, will always be more challenging. If in addiGon, your customer is a large company, you might find that they have spoged a risk free, zero interest, loan opportunity.

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Automa=on – The secret weapon of efficiency

Cloud soJware that automates menial tasks is proliferaGng as more and more companies discover their benefits. One famous markeGng slogan by Apple was “There is an app for that”. This doesn’t only apply to the Apple app eco-system anymore. Many accounGng soJware providers embrace soJware add-ons as a way to offer beger soluGons to their customers that go beyond basic accounGng features.

Credit control is sGll very much a labour intensive process but technological developments, over the last 10 years, have meant that many repeGGve and laborious tasks can now be automated. This has given credit control departments the ability to track outstanding invoices, send out reminders and statements and create age debtor reports. By using these tools, you can save valuable Gme and only focus on debtors that require more agenGon.

On average, SMEs spend 10 hours per week chasing customers for payments. Most of that Gme is allocated to monitoring aged invoices and sending out invoice reminders, communicaGng back and forth with your debtors and following up with phone calls. AutomaGon will not stop you from having to pick-up the phone but it will significantly diminish the number of clients you must contact and phone calls you need to make. In most cases, invoice reminders are all that is needed to get your debtors to pay you.

Why would you want to approach all debtors equally if only a handful require a more proacGve chasing approach? Add-ons for accounGng soJware have evolved to a level where automaGc emails feel and look as if they had come directly from you and wherever you need to be more forceful, you can change the tone and frequency of the reminders.

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The ul=mate credit control approach

1. Send invoices asap

If you don’t send an invoice, don’t expect to get paid. That sounds quite obvious but the sad reality is that an alarming number of businesses do not send invoices to their customers in a Gmely fashion. Every delay in sending out invoices negaGvely affects your cash flow.

Best pracGce suggests that you phone your client the moment you sent out an invoice. This increases your client’s awareness of the newly issued invoice and gives you an opportunity to ask for the person who is dealing with payments in your client’s company. In reality, freelancers and small businesses don’t have the Gme nor the resources to implement such a proacGve credit control process. Luckily, automated soluGons help you streamline this process by taking the pain out of acGvely chasing most of your debtors personally.

As your payment terms usually only apply aJer the customer has received their invoice, it is in your best interest to issue these promptly. Just think about the number of addiGonal trade credit days you provide to your customers that are outside of your agreed payment terms. Many businesses can noGceably improve their cash flow by just sending invoices in a Gmely fashion and to the right person. It is worth poinGng out that the person you invoice is not always the one you are actually working with regularly.

By using an accounts receivable customer relaGonship management (CRM) system, such as Satago, you can configure your system to contact your customer

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automaGcally, a few days aJer invoicing, to prompt them to confirm the receipt of an invoice.

Finally, you should ensure that your invoice is accurate. It’s beger to be meGculous and give too much detail than too ligle, especially if you consider that invoice disputes due to missing details is the third most common excuse for late payment. And remember, that invoice reconciliaGon can be complex at Gmes so you should make sure that your clients include your invoice numbers as references for every payment they make. This will help you work out which invoice has actually been paid.

Invoice reminders – A simple, yet underestimated credit control tool

For reminders to have the right impact, proper wording and sufficient informaGon are key to geSng the most from them. To be truly effecGve, the first invoice reminder should be sent before an invoice reached its deadline.

Subject Line - The first impression is everything

The subject line is the first point of contact with the debtor aJer an invoice has been issued. The same principle that applies to outbound sales emails and email campaigns applies to your reminders: your subject line needs to be acGonable, to the point and describe the subject of the email.

Your subject lines should start with the word ‘Remember'! And, we do mean Remember. You might be surprised, but this simple word can make a huge difference. Basically, it indicates that a course of acGon is required. Don’t call it reminder despite the fact that this is what your email is all about. The email markeGng provider MailChimp found that the word ‘Reminder’ in a subject line

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affects your opening rate negaGvely (If you were curious about other ’no-go words' - the words ‘help’, ‘free’ and ‘per cent off’ are equally negaGve).

We have found the following subject Gtles to be highly effecGve:

1. Remember! The following invoice needs your agenGon.

2. Remember! COMPANY’s invoice #### is sGll overdue!

3. COMPANY's Invoice #### requires your agenGon!

Level of Severity

If your first reminder was ignored, we highly recommend that you increase the severity of your tone in your second reminder and onwards. You should ensure that your message comes across succinctly. Don’t forget, you are seeking to get paid on Gme, therefore, don’t be shy to charge late fees where you feel it is applicable. More about late fees on page 13.

Professionalism is key

Never let your emoGons get in the way. In a business seSng, it is crucial to keep a professional tone if you wish to be taken seriously.

Ask why they are late

This might be obvious but we were surprised by how many people forget to invesGgate the reasons why a client is not paying on Gme. Once you know the reason for late payment, you might be able to help them by altering your payment terms or offering an instalment programme.

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Personalise your messages

You should have templates that can be used for most of your clients most of the Gme. However, for your best customers, it makes sense to always tailor your emails and add a personal touch as it can make all the difference in geSng paid faster.

2. KYC – Know Your Customer

Before working with a new customer, you should know whether they will, or are able, to pay you promptly (or at all). What do you know about them or their business? Do you have any informaGon about their financial health? Your best course of acGon is to use credit risk data, such as that offered by credit reference agencies (“CRAs”), such as Creditsafe, and available within the Satago plaKorm.

A credit report contains a lot of informaGon about your customer’s business including their credit score which is a key metric of financial health. The credit score is a numerical representaGon of the likelihood of the business failing within the next 12 months. The greater the number, the more unlikely it is for the business to become insolvent. It should be noted, however, that a high credit score does not necessarily mean that a company pays its invoices on Gme. In our experience, a large percentage of businesses with good credit scores will pay their suppliers as late as possible.

County Court Judgments (“CCJs”) are a good place to look for acrimonious situaGons and possible future problems. Be very wary of companies that have frequently been taken to court to force them to pay their invoices. There may be a reasonable explanaGon for CCJs but it is prudent to enquire as to the circumstances.

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What should you do if a company has a poor credit raGng and/or mulGple CCJs?Well, the first quesGon to ask yourself is whether you want this company as a customer. Is it beger to have no customer than a customer who is chronically late in paying you? You may not be in a posiGon to be so selecGve. If this is the case, insist on a porGon of the payment upfront and try to negoGate reduced payment terms so that you can begin chasing your money sooner.

3. Provide incentives to get paid faster

Don’t get us wrong! We think you deserve to get paid on Gme and it goes without saying that you should get paid in full. However, late payments are ubiquitous. Finding ways to decrease this likelihood is just good business and providing incenGves can actually help to get you paid on Gme. Instead of creaGng a culture of late payment, it might be beneficial for you to provide a discount for early invoice seglement. A usual rate for discounGng your invoice is about 2% for invoices paid within 10 days, with no discount for the normal payment terms of 30 days.

By geSng paid faster, you can invest in your business and decrease your days sales outstanding (“DSO”) significantly. Kahneman and Tversky found that the 1

emoGonal impact of losing money on people is stronger than the gain. They called it Prospect Theory and it has the same relevance to invoice discounGng. A customer values the loss of not taking the discount and decides to pay you early.

Kahneman, Daniel and Tversky, Amos, “Prospect Theory: An Analysis of Decision under Risk”, 1

Econometrica, 47(2), pp. 263-291, March 1979

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4. Sometimes we overlook the obvious - KISS

No, we are not suggesGng that you get inGmate with your debtors. What we are referring to is the principle of ‘Keeping It Simple, Stupid’. Originally used by an design engineer in the U.S. Navy in the 1960s, it can be applied to other processes as well. The theory suggests that taking people through each step in a process, makes it more likely that they will display the behaviour desired.

Outlining the essenGal informaGon in an invoice reminder (amount, issue date, bank details, etc.) makes it easier for your customers to pay you. Making use of different channels (texts, emails or legers) can ensure that they will receive and noGce the reminder.

Remember, to tailor your message to your customer. For example, millennials are oJen more tech-savvy than previous generaGons and might see your reminders if they are sent via SMS or email but miss a leger in the post.

6. Your rights

For many business owners, it oJen comes as a surprise to find that they have a statutory right to claim late payment fees once an invoice is overdue.

In the UK, you are enGtled to charge a compensaGon rate of:

• £40 for invoice smaller than £1,000;

• £70 for amounts between £1,000 - £10,000;

• £100 for amounts above £10,000.

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In addiGon, you can charge 8.0% p.a. above the Bank of England base rate on amounts overdue.

We don’t recommend using late payment charges for all your customers, as it might sour your business relaGonships. However, for those customers that need constant reminders, we think a warning, that late payment charges will be applied, should be included in your reminders.

Provided that you have sent several reminders to your client, we highly encourage you to start charging late fees for invoices that are overdue by more than 45 days.

You should not issue an addiGonal invoice to your customer but only state the addiGonal amount due in your correspondence to them.

7. Letter before action

For invoices that are older than 90 days beyond the due date, you should issue your customer with a ‘Leger Before AcGon’ (LBA). This is a formal reminder that it is their last opportunity to segle their debt before you start legal proceedings. You can send this leger yourself or approach one of the many legal firms specialising in debt collecGon.

Around 90% of debtors will segle soon aJer receiving an LBA. The LBA should contain all details of the invoice, the pre-agreed due date and state that you have taken reasonable steps to recover the money. You need to specify that if the debt is not paid by a new specified deadline, you will issue legal proceedings for a CCJ.

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Do I need credit control staff?

With all this automaGon, you might wonder whether there is a human component to debt collecGon and whether you actually do need a credit controller. If you issue up to 1,000 invoices per month, you can easily do without a dedicated credit control manager by automaGng the reminder and invoice statement process. We would advise that, as a rule of thumb, businesses that issue between 1,000 and 1,200 invoices per month should consider hiring one credit control manager.

For every extra 1,000 invoices you issue per month, another full-Gme credit control person might be worth adding to your staff. Remember, though, that if you make use of automaGon, such as the free service offered by Satago, you can have an effecGve credit control team without undue expense. StaGsGcs show that SMEs spend an average of 10 hours per week chasing their customers for payment. At Satago, we found that, by using our plaKorm, companies could cut that Gme down to about 2 hours a week and that roughly 80% of companies that receive invoice reminders will pay on Gme. This means that approximately 20% of your customer base will require a more proacGve chasing approach entailing your credit control staff to follow up with a phone call or go down the legal route. This keeps your costs low and sGll gives you complete control over your accounts receivables.

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Bonus Material Example reminder templates to get you paid faster

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X days before due date

Subject: Remember invoice [INVOICE NUMBER] due in X days

Dear [NAME],

We trust that you have been saGsfied with our service as much as we enjoyed working with you. Please note that invoice [INVOICE NUMBER] is due on [DUE DATE]. Please find below our bank details to ensure prompt payment.

BANK DETAILS:

Account name:

Sort code:

Account number:

IBAN:

BIC:

Please contact us on EMAIL/PHONE if you have any quesGons and please remember to always add the invoice number to your payment.

Yours sincerely,

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3 days after due date

Subject: [INVOICE NUMBER] is now past due by 3 days

Dear [NAME],

I note from our records that invoice [INVOICE NUMBER] remains outstanding. Please find a copy of your invoice agached [LINK TO PDF COPY] (if your system supports that funcGonality).

Late payment of invoices causes severe stress to our business and increases our administraGve costs. Please ensure immediate payment or inform us about issues prevenGng payment.

In future, we would appreciate if you could pay your invoices promptly to prevent addiGonal costs.

Yours sincerely,

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7 days overdue

Subject: [INVOICE NUMBER] requires your agenGon

Dear [NAME],

According to our records invoice [INVOICE NUMBER] for [INVOICE AMOUNT] has not yet been paid.

This invoice was due on [DUE DATE] and is now [DAYS OVERDUE] days overdue. Please arrange for this invoice to be paid as soon as possible.

Thank you for your prompt agenGon with this mager. Please ignore this email if the invoice has been paid in the last 2 days.

Yours sincerely,

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14 days overdue

Subject: Remember! invoice [Invoice Number] is sGll overdue!

Dear [NAME],

Unfortunately, we haven’t received payment for invoice [Invoice Number] which was due on [DUE DATE] and is now [DAYS OVERDUE] days overdue.

Late payment of invoices causes severe stress to our business and increases our administraGve costs. Please call us immediately to discuss how best to deal with this situaGon. AlternaGvely, please iniGate payment within 7 days to prevent us from exercising our statutory right to claim interest and compensaGon for debt recovery costs under the late payment legislaGon.

Yours sincerely,

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21 days overdue

Subject: Final warning – invoice [INVOICE NUMER] requires your immediate agenGon

Dear [NAME],

Our records show that invoice [INVOICE NUMBER] is overdue by [DAYS OVERDUE] days despite our previous invoice reminders.

As late payments cause addiGonal administraGve costs, we have no other choice but to exercise our statutory right to claim interest and compensaGon for debt recovery costs under the late payment legislaGon. Charging you [LATE FEES] in late fees will enable us to keep our costs down so that you benefit from compeGGve prices. As a result, please note that you now owe us the [INVOICE AMOUNT] plus [LATE FEES].

Please transfer this new total immediately to prevent court acGon. Please find agached a copy of the invoice [INVOICE PDF COPY LINK] (if your system supports that funcGonality).

In future, we would appreciate if you would consider paying your invoices promptly to prevent addiGonal costs.

Yours sincerely,

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