By Claire West

A proactive approach to credit management is key to establishing good relationships and ensuring viable credit terms, which can then help small and medium-sized enterprises (SMEs) punch above their weight, says ACCA (the Association of Chartered Certified Accountants) and Kingston Smith LLP today.

This advice, coupled with ten top tips for SMEs to cope with credit, comes after publication of the Independent Commission on Banking's interim report on banking reforms.

While ACCA does not believe that the Commission's interim report will bring about any dramatic changes for SMEs in the UK when it comes to accessing finance, it does believe that practical guidance is needed for SMEs on what they can and should do to cope with money issues.

This practical advice has been compiled with accountancy firm Kingston Smith, and is a means for even the smallest suppliers to manage their credit proactively:

1. Make trade credit and debt collection part of the overall strategic direction of the organisation; ensure it is independent of sales and accountable directly to the owners or senior management.

2. Bring the credit control function to the front of the sales process to ensure early awareness of problems before it is too late.

3. Make sure the terms of trading, including payment terms, emerge from an agreed credit control procedure, not habit. Some sectors have pretty strong conventions on this but there are always exceptions, while service and responsiveness definitely assist in changing the landscape.

4. Get the right people in place doing the correct job. Credit management must not be seen as impeding sales but as finding a viable way for each sale to go ahead.

5. Agree payment terms upfront - certainly before the sales contracts are finalised.

6. Invoice promptly and ensure receipt is acknowledged.
7. Find out who is personally responsible for the above on the customer's side, and what systems the customer uses to register and process invoices.

8. Make use of the right the law gives you to charge statutory interest, e.g. by invoicing for this automatically and ensuring that it is in your terms and conditions.

9. Learn to make a business case for credit decisions rather than just using them to increase sales.

10. Align incentives for income generators to profitability and cash collected, not just invoiced turnover.

Marc Fecher, Specialist Corporate Finance Partner with Kingston Smith and Chair of ACCA's Corporate Sector Panel says: "Some suppliers operate a reactive approach to collecting their debts and don't know they have a problem until it's too late. A proactive approach to the management of trade credit and strong relationships with customers is always the best way to ensure swift payment and provides an early warning of problems on the horizon, resulting in a lower rate of bad debts."

Recent data confirms that overdue payments to SMEs fell by an astonishing 19% in June 2010 compared to the previous year. While some of this may be down to a fall in business activity due to the recession, ACCA's joint survey with the CBI shows evidence of tightening credit management policies among SMEs.2

For every £1 of short-term bank debt they use, businesses draw another £2 of trade credit from their suppliers. These are usually small businesses that can rarely afford to specialise in finance and the management of credit risk. In fact, UK SMEs are typically owed an amount equal to 29% of their total assets by customers - a figure in the hundreds of billions of pounds.3 Despite last year's progress, UK SMEs are still collectively owed £24.6bn in overdue payments and many cease trading every year, which poses the risk of bad debts and cashflow issues. This demonstrates the need for SMEs to follow best practice when considering credit management and to include it in the agenda at board meetings.

Marc Fecher continues: [i]"A proactive approach may even preclude the need for businesses to substantially increase the level of their banking facilities, as tighter credit procedures could enable them to require lower levels of bank funding, which has the added benefit of a reduction in cost and lowering of business risk.

"A formal review of your credit procedures, which challenges and takes into account your future business aspirations is highly recommended," says Marc. "In fact, your professional advisers undertaking a third-party review of your terms of trade and business processes could prove invaluable."