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Credit control and debt collections: How to balance cash flow and customer relationships in a volatile economy

March 16, 2021

This article originated from the Xero blog. The XU Hub is an independent news and media platform - for Xero users, by Xero users. Any content, imagery and associated links below are directly from Xero and not produced by the XU Hub.
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Small and medium-sized enterprises (SMEs) form the foundation of the European economy. According to Eurostat, taken as a whole, European SMEs account for more than half of the European economy’s economic value and employs around 75 per cent of its workforce.

However, according to research by McKinsey, more than half of SMEs surveyed in France, Germany, Italy, Spain and the United Kingdom are concerned they may go out of business within the next 12 months.

The impact of the global pandemic on SMEs has been brutal, with 70 per cent reporting a severe decline in revenues. In light of this crisis, both cash flow and the repeat business ensured by customer loyalty have become critical and sometimes competing priorities.

In this article, we’ll be discussing the impact of Covid on European SMEs, strategies for credit control during the ongoing pandemic, and how effective debt collection doesn’t have to ruin your customer relationships.

Impact of Covid on SMEs in the European Union

The unprecedented fallout of the Covid-19 pandemic has been felt across all industries in the European Union. However, some industry sections were hit far harder than others.

Crippled by widespread border closures, national lockdowns and, social distancing measures, the European tourism industry has haemorrhaged an estimated €100 billion. These losses have put 265 million jobs at risk and devastated a sector that provides 10 per cent of the European GDP.

The construction industry has also been hugely impacted by Covid-19, with nearly 70 per cent of UK construction companies surveyed by CHAS having to cease operations during the pandemic. Around 80 per cent also had to cancel projects, and 50 per cent have had to reassess their credit control and risk management strategies.

Unsurprisingly, the logistics sector has also been hit hard by border closures. Many companies have experienced colossal supply chain disruptions, with China implementing a hard lockdown in the early stages of the Covid-19 and considerable constraints being placed on ocean and air freight.

Around 76 per cent of respondents surveyed by Fleetpoint reported a general downturn in business. Confidence in the business outlook for logistic companies was just 4.22 out of 10. The businesses involved in these sectors are overwhelmingly SMEs, and very few have the reserve capital to deal with downturns of this scale, making liquidity critical to their survival.

Unfortunately, in line with the economic impact of Covid, the number of unpaid invoices has skyrocketed, from 16 per cent pre-COVID to more than 53 per cent by the end of April 2020.

Unfortunately, in line with the economic impact of Covid, the number of unpaid invoices has skyrocketed, from 16 per cent pre-COVID to more than 53 per cent by the end of April 2020. According to research by Tide, SMEs are facing a collective shortfall of £50 billion in late payments. These outstanding payments have a massive impact on liquidity at the worst possible time.

In an attempt to stabilise their accounts receivable, SMEs are also spending 30 per cent of their time conducting the unprofitable admin task of chasing unpaid invoices. In light of this crisis, what steps can SMEs take to effect debt recovery and effective credit control without impacting customer loyalty?

The importance of portfolio analysis in a Covid world

Understanding how likely a given customer is to pay on time is vital to predicting cash flow for SMEs. One way in which companies can affect these predictions is to examine the impact of the Covid-19 pandemic on different industries in different countries.

The response to the pandemic across Europe was far from unilateral, with different governments and industry bodies implementing various restrictions and assistance packages. The location of your customer and the industry in which they operate will significantly impact their ability to pay you for your goods and services in a timely manner.

As we’ve already mentioned, tourism, construction, and logistics have been devastated by the impact of Covid-19, as has the indoor dining sector, gyms, and brick-and-mortar retailers. However, supermarkets, online retailers, streaming services, food delivery services, liquor stores, and workspace solution providers have weathered the pandemic well or even thrived. Understanding the impact of the pandemic on your customer portfolio is key to implementing effective credit control strategies and ensuring your own liquidity.

Payment data and customer segmentation

While a more comprehensive understanding of how the pandemic has impacted industries is essential, a granular analysis of your customer’s payment habits can significantly help your credit control efforts.

Monitoring your customer’s payment behaviours generates crucial insights into the stability of their business. Understanding your customer and their business’s situation allows you to adapt your approach to credit control accordingly.

It is also worth noting that there are economic challenges on the horizon other than the current pandemic, including the looming recession and the economic impact of Brexit.

Chaser users have access to a full suite of data analytics through the Chaser dashboard, including customer payment data. Access to this kind of data analysis allows our users to understand customer risk and implement debt recovery strategies tailored to their customer’s specific situation.

Rethinking credit control strategies

Even before the pandemic, most SMEs were in the problematic position of juggling the need for effective credit control with the desire to build customer loyalty through the creation of a friendly relationship.

According to Dun and Bradstreet’s research, 51 per cent of the 500 companies they spoke to believed that the number of late payments had increased over the past three years.

In the UK, around £23.4 billion worth of late invoices have not been paid to SMEs, leading to the closure of approximately 50,000 businesses every year. The problem of late payment is so significant that the UK government has instituted changes to the Payment Code (PPC) to try and rectify the situation.

However, there are steps that individual businesses can take so improve their credit control without ruining the customer relationships they’ve worked so hard to build.  

Chaser’s automated credit control software has helped our customers recovers over £3 billion worth of invoices to date with an 80 per cent success rate. Chasing late payments costs SMEs around £4.4 billion per year. Using our automated services means you don’t have to waste time and money on chasing unpaid invoices and refocus your efforts on expanding or improving your business.

Our services combine the increased efficiency and reduced costs of using automation with the human touch needed to improve your customer relationships. All our chasing emails can be customised to suit your businesses voice and the relationship you have with the customer you’re chasing. Emails will also appear to have come from your personal email address.

Using the data analytics on the Chaser dashboard, you’ll be able to define the best times to chase specific customers for unpaid invoices. You’ll then be able to schedule your payment reminder to be sent at the most effective times.

Once payment has been made, Chaser helps you continue to build on your customer relationships with automated ‘thank you’ emails.

Friendly debt collectors like Chaser

While using Chaser’s automated credit control systems can help you recover around 80 per cent of unpaid invoices, that last 20 per cent might be crucial, especially during the current challenging economic climate.

Many SMEs would prefer to write off bad debt rather than escalate it to collections service because debt collections have a reputation for using aggressive and harassing tactics. At a time when repeat business is vital to SMEs, these tactics can severely damage your relationship with a valued customer.

Additionally, empathy during a time of crisis is an excellent way to cement a positive reputation for your business and continue to build a relationship with your customer.

Chaser’s Collections Service removes all of the traditional negatives of debt collections and replaces them with a streamlined service based on empathy, mediation, and polite persistence.

Since all of your customer and invoicing data is held in the Chaser Dashboard, you can escalate an invoice to us in just two clicks, avoiding a time-consuming handover. We’re entirely transparent about both our pricing and our collection strategy. You’ll get an in-app quote for the level of service you need before you escalate your case, and all our communications with your customer are recorded and viewable by you.

The priority of our collections team is to maintain a positive relationship between you and your customers. We don’t employ aggressive or harassing tactics. Instead, we act as mediators using polite persistence to reach the best possible solution for both you and your client.

Chaser Collections is a new approach to debt collection that offers a valuable and innovative service to businesses experiencing volatile and challenging economic conditions.

We're here to help!

We understand the pressure Covid has had on European SMEs and help that our suggested strategies for credit control during the ongoing pandemic can be of use. Please do not hesitate to contact us at any time, even just for advice or support.

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