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97 Complete - Practical - Proven How to Have Credit Customers Pay On Time All the Time Be paid on time MasterClass CAVENDISH Kings Court, School Road, Hall Green, Birmingham B28 8JG UK Telephone: + 44 (0) 121 244 1802 Fax: + 44 (0) 121 733 2902 Email: info@cavendish-mr.org www.cavendish-mr.org CAVENDISH

Transcript of bepaidontime pdf

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Complete - Practical - ProvenHow to Have Credit Customers Pay

On Time — All the Time

Be paid on time MasterClass

CAVENDISH

Kings Court, School Road, Hall Green, Birmingham B28 8JG UK

Telephone: + 44 (0) 121 244 1802Fax: + 44 (0) 121 733 2902

Email: [email protected]

CAVENDISH

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Achieving Business and Personal Excellence

By

Dr. COLIN THOMPSON

`A WINNING ATTITUDE LEADS TO SUCCESS`(Every one should have one!)

Winners are people that strive to be all they can be, and will go to great lengths toreach there potential. An internal burning desire drives them to be successful. Theypossess a positive attitude and can focus their energy. They become stimulated bythe challenge of creating the future they want and then act to complete the task.

Creating a winning attitude comes from first setting clear, concise and attainablegoals. The objective of goal setting is to provide a clear sense of direction and toproperly plan and organise events and performance.

The next step is to establish a positive self-image. We can attain this through apersonal vision of successful future accomplishments, acting confident and beingproactive. Other steps include monitoring your performance against your targets,(every job has its own Profit and Loss record) as this would motivate you to give anextra effort if you are falling short of measured goals.

Finally, reminding yourself of your victories will reinforce a positive attitude andmaintain a winning state of mind. When results do not materialise as planned, awinning attitude helps to look towards the next time and next opportunity. Attitude isthe difference between a non-win and a failure. A person only fails when he or shequits. Trying again means that he or she has learned one way in which they cannotachieve the goals. But striving to be successful takes attitude! Be passionate forsuccess and your disciples will make it happen!

Remember, a successful and positive person is a person who is available to helpothers succeed in a world of endless opportunities that extend across many businesssectors, from strategy through to implementation. Accelerate your impact on yourbusiness and personal growth with the `right` attitude to be successful.

Business and general life is about dialogue that we `all` understand and respond to.So make the playing field equal, so all people understand the language used and theaction to take, to receive and accept, so business life and general life is successfulfor `all` involved.

Yes, you can achieve all things in life by your attitude to be positive, you have thesolution in you, so go forward and use it now and be successful in your business andpersonal growth.

"Morale and attitude are the fundamental ingredients to success."

-- Bud Wilkinson

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Be paid on time MasterClass

CavendishKings CourtSchool RoadHall GreenBirminghamB28 8JGUK

Telephone: + 44 (0) 121 244 1802Fax: + 44 (0) 121 733 2902email: [email protected]: www.cavendish-mr.org

© Copyright 2003 Colin Thompson

First Edition 2003

The material contained in this book is set out in good faith for general guidanceand no liability can be accepted for loss or expense incurred as a result ofrelying in particular circumstances on statements made in the book. The Lawsand Regulations are complex and liable to change, and readers should checkthe current position with the relevant authorities before making personalarrangements.

PROVIDING THE SOLUTIONS FOR SUCCESS

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Contents

Copyright

Introduction

Author’s ProfileWe PromiseFollow up

The Modules

Module OneModule TwoModule ThreeModule FourModule Five

InterludeModule SixModule SevenModule Eight

Sample Documentation

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Copyright

“Be Paid on Time” was published electronically in April 2003.

ISBN 0-9532679-1-1

The information contained in “Be Paid on Time” may not be usedas a basis for seminars, workshops or training events conductedfor gain, hire or reward, without the written permission of theour organisation - Cavendish.

It may be used without restriction for internal managementpurposes within any company that has purchased an originalcopy from an authorised source.

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Author’s Profile

With a lifetime experience of involvement in a wide variety of smaller,private sector businesses, Ted Rose (b. 1936) became Chairman of anaccredited domestic electrical test laboratory, Rowland Laboratories Ltd.,in 1987. In 1993 he also took over as Managing Director. In January 1998he sold the business to a multinational company whose Presidentdescribed it as “The best laboratory in Britain.”

In the course of this sale, persistent questioning by the purchaser’saccountants made him aware that the company’s debtor control had beenunusually efficient. The business had virtually no overdue debtors.

Advance publicity surrounding the government’s manifesto and whitepaper in respect of what has now become the Late Payment ofCommercial Debts (Interest) Act 1998, coupled with the launch of theBetter Payments Practice Group (BPPG), drew the author’s attention tothree facts:-

First, late payment of invoices was a major problem for many businesses,especially SMEs.

Second, he had evidently developed methodology capable of eliminatingthe problem.

Third, attitudes to debtors and the procedures commonly advocated werefundamentally flawed. Any business following conventional advice mustinevitably run into problems with late payments.

Further research revealed, extraordinarily, that virtually all advice on thesubject concentrated upon procedures for obtaining payment, only after ithas become overdue. Whereas, quite obviously, truly correct debtormanagement must create an environment in which every customerexpects and is willing to pay on time. Anything else is failure, notmanagement.

Having retired from mainstream, executive management, the author isinfuriated by the sloppy thinking that creates a failure to manage debtorsin a positive manner and which therefore flies directly in the face ofexcellence in customer relationship management (CRM).

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We promise that this system will enable managers of small ormedium enterprises to make their debtor management a positivetool towards growth and prosperity.

The difference between what you will learn in “Be Paid on Time” and whatyou have seen elsewhere is quite simple. Most advice about credit controlis created by academics or credit managers and directed at professionalcredit managers. Accountants, bankers and credit managers in largeorganisations treat the subject as a numbers game.

The reality for those of us running our own businesses is quite different.Debtors are our customers. Our customers are to be cherished becausethey pay our salaries. The care and nurturing of customers, and thereforeof debtors, is a job for sales people, not for accountants.

We know that it is more effective to concentrate on retaining delightedcustomers, meeting their repeat orders, or selling them a wider variety ofnew products or services than it is to ignore them while looking for newcustomers. Indeed, gaining new customers while simultaneously losingexisting ones does not constitute development at all. The latest re-packaging of this nurturing concept is Customer RelationshipManagement, CRM, but with particular reference to the use of electronicsystems in order to do so.

It requires very little thought about CRM philosophy before it becomesobvious that traditional, conventional methods of credit control,historically looked upon as a function of the accounts department, arenegative and confrontational. Such antagonism is in complete contrast tothe rest of a company’s CRM based attitude to its customers. Thistherefore has to pose a significant barrier to the success of the company’soverall marketing efforts.

No company seriously intent on cultivating positive relationships with itscustomers, as an essential ingredient of its marketing methodology, canafford to have a significant customer interface malfunctioning in this way.

The simple message behind “be paid on time” is that the entireframework for providing credit and collecting payment has tomake a positive contribution to the company’s image, growth andprofitability. Not only is this perfectly possible: it is much easier tomanage than any alternative.

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Follow up

Don’t waste it!

Once you have read through this documentation of the workshop, you willwish to ensure that the ideas are fully implemented in your own company:we want to make sure it works for you.

There will always be discounted arrangements for those who havepurchased the documentation first, but then decide to attend aworkshop.

We will always pay you or send you a gift in exchange forreferrals: just let us know the name of the person you haveadvised.

Workshops will normally be restricted to twelve delegates in order toensure maximum individual attention and value. As an alternative, apartfrom running workshops, we are available simply to help you win heartsand minds: outside consultants can sometimes assist in overcoming thebarriers of hierarchy, age, or office politics.

If you would like us to facilitate some in-house training, or simply adviseon certain aspects of debtor management, please let us know. Havingattended a seminar you will automatically be e-mailed updates, tips andlatest thinking, unless you ask not to.

The benefits to staff morale, mutual respect and job satisfaction will besignificant. It remains important, if the company is to gain full advantageof this, to ensure that each member of staff is aware of the personalbenefit to him-, or her-self.

Move on: in conjunction with Investors in People and the concept oflifetime learning, we have developed The Training Matrix ™, whichtransfers ownership of training achievements from forgotten managementfiles to individual staff members.

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Module One

You will learn:

The fundamental importance of having a defined Unique SellingProposition, USP, in order to set up constructive debtor management.

The underlying benefits of having a written credit policy.

YOU HAVE THE POWER TO CONTROL YOUR WORLD

The reason for late payment of invoices (and eventually of bad debts) willinvariably have gone back, not just to the time the order was taken, butprobably to the day the business was founded. That is why it is sofundamentally important to start from a position of strength, creating apositive attitude to customer relationships from the very outset.

That strength stems from objective self-knowledge: why you are in yourparticular business, what are the core essentials of your offer and how yourelate to the competition. This is nothing to do with accountancy:everything to do with marketing. There are plenty of perfectly validreasons for setting up a business, but the single, universally vital thing isthat people should pay you for your product or service.

My proposition is that the entire subject of Credit Control, theprovision of Trade Credit, or Debtor Management, is a function ofmarketing. Every aspect must be managed so as to make a positivecontribution to marketing. Your credit control system must not be allowedto be a barrier to trade.

Your U.S.P.: what is it you provide? What is different? What is specialabout it or the way you supply it? Why should anyone buy what you offer?Why should they buy from you and not from someone else?

Look for ways in which you might accentuate that difference. If it is atechnical edge, what benefit does that provide for your customers? Canyou deliver in such a way as to increase those benefits, make them moreapparent?

If it is a service, what is normal in your chosen market? How can youprovide it in an innovative way? Examine all the little parts of your offer tomake them special.

Be honest with yourself about why you think your business hasa future. Be ruthless with your personal plans if you think it may not have.

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Once you have made it your habit to look at your projected business inthis way, you should begin to realise that the payment terms are notsomething separate to be left to accounts clerks, but an importantelement of your entire relationship with every one of your customers.When you are confident about what you offer (as opposed to what othercompanies offer) you have no reason to be frightened to charge for it. Thisis why you must know the components of your Unique Selling Proposition.

Therefore:IF YOU CAN’T IDENTIFY YOUR U.S.P., DON’T GO INTO BUSINESS.

One tends to assume that your USP has to be some amazing technologicaladvance. It is much more likely to be a combination of mundane things:

You open late or early or at weekends to suit customers whomight be commuting. You man the telephones to answer callsfrom the USA or Japan at their peak times.

You deliver or collect more frequently or reliably, or in smallquantities.

You manufacture short runs, keep special purpose stocks. Your lead times are shorter, or response time quicker. You speak the language. You’re friendlier, more helpful, or more often available. Your quality – fitness for your customer’s purpose – is better. You compete with very large companies that simply don’t look

after the needs of their small, but your big, customer.

Case Studies:-

It might be that your customer wants his paper delivered before7.30, when he leaves for the station and the other localnewsagent can’t oblige.

A car service customer can leave his car at the garage for repairfirst thing in the morning, but it must be delivered back to hishome by 6.00. He expects it clean inside and out. The garage hehad been using made him mad because they left him to disposeof the plastic sheets they had used to protect the car seats. Yourrepair service gets rid of them for him — and washes the car.

Another business wants small quantities, only “250 size A”delivered before 9.00 on Mondays and “275 size B” on Tuesdayevenings.

The packing for an export order involves a different size of pallet,special strapping and the paperwork exactly correct to avoid ahold-up on the Hungarian border. Get that absolutely right and itis worth more to the customer than the value of the originalorder.

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You have someone answering the phone, in person, with a reallycheerful, helpful attitude to each customer’s individual request ― as opposed to one of those dreadful, automated systems.

There are lots of grand names and detailed techniques covering much ofthis process: Strategic Planning, SWOT analysis, and so on. SWOT standsfor Strengths, Weaknesses, Opportunities and Threats.

The trouble is that my view of a threat could be your golden opportunity!

Case Study:-

One shoe salesman in darkest Africa sees no call for his productas nobody wears shoes. The next asks his boss for immediatesanction to open a permanent branch in order to service thebiggest market he has ever seen.

The greatest danger, strangely enough, lies with those businesseswhere the founder has a particular technical skill, or a personal interest, oran invention. They tend to be completely introspective, with no realunderstanding of who might want to buy from them, or why. Successfulbusinesses require a mix of skills (which have an unfortunate habit ofchanging as the operation grows!) so it is well worth taking advice at theoutset. Many of the re-vamped Business Links/Small Business Servicecentres now provide just such an intelligent service.

The processes involved in finding out about customers’ needs can be quiteinvolved and complex, and at the same time paradoxically simple. Most ofus have a perfectly natural reticence about asking naïve questionsbecause we think we will appear stupid. In fact, of course, the opposite istrue. The real problem is that buyers tend to be short of time, so it isessential to gather information in a clearly helpful manner. Helpful to thecustomer, that is.

Really good salesmen learn to listen to the need behind the words. Thecustomer does not always know the most effective route to satisfyingthose needs, or solving his problem. This is especially true in the fastchanging electronic world of computer systems and informationtechnology: I speak from personal experience! But let me give a couple ofmuch more mundane examples.

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Case Study:-

A man goes into your D.I.Y. store to buy a drill, rawlplugs andscrews. What does he actually want? He has bought his wife awonderful new painting and wants to hang it on the wall of theirliving room. He doesn’t really want a drill. If you told him aboutthose new toughened little three-pin systems and sold him one ofthose instead, although that particular sale would be much less,you would gain a customer for life (as well as the people he tellsabout you) no matter that the local superstore with its boredcheckout girls might offer cheaper prices.

Case Study:-

One of my managers, a brilliant technical boffin, assured me thathe knew all about his customers. Among them was an importer ofdecorative lighting from whom we failed to win repeat business.The reason? He was actually an exporter of light bulbs and hisonly import had been a one-off, quid pro quo shipment, as afavour to one of his own customers. Because we had madeassumptions, we hadn’t even offered him our technical assistancefor exporting to Singapore, which would have been of genuinehelp to him.

Ask questions.

This is one reason why being made redundant is so often a surprisinglygood springboard for founding a business. The founder will more thanlikely have a very sound idea of the market, costs and prices, demand forshort runs, speedy response, or genuine customer care within the industryhe has just forcibly left — all of which can prove to be vital ingredientsthat fall from the negligent claw of a large company.

These are precisely the sort of aspects that may have a significant value inthe opinion of your customers. Your job is to listen to the balance of whatis really helpful, really important to them. Translate that into your ownUSP and it becomes relatively easy to ensure that they recognise thatvalue and are prepared to pay for it and pay on time ― all the time.

This creates the first vital step to enable you, not just to plan your ownfuture, but to create your future on your own terms and be in a position toreap the benefits, year after year. You will have the confidence to be incontrol of your customer relationships and the credit facility you provide.

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Confirmation of this comes in the form of research from BradfordUniversity which has shown that companies employing good creditmanagement practice, regardless of their size, consistently outperformthose without.

The sequence therefore has to be:

o Decide what business you are in, what your market is and whatfeatures make your offering so special.

o Decide on your Terms of Trade.o As part of your Terms of Trade, you will have to define your

credit policy. [See Module Four.]o Develop the confidence to include your terms of trade with

every quotation to every customer.o Understand that your professional image will be enhanced by

your having with you a Credit Facility Form to be filled in by thecustomer at the order stage.

o For every customer you will have to make a conscious decisionwhether or not to provide credit.

We will come to examine the above documents in detail and also thepractical processes involved in order to decide on the provision of credit.

Recap: The Core Message for Module OneThe management control of debtors is a matter of confidence.

Understanding of your USP will provide this.

Exercises for Module One

1. Define USP.2. Explain your company’s USP.3. Suggest ways in which it might be reinforced.4. Name three benefits of having a written credit policy.5. Why does redundancy often present an excellent opportunity for setting

up a business?

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Your Notes and Answers to Exercises

1.

2.

3.

4.

5.

Module Two

You will learn:How to draw up Terms of Trade that actively support your business.How and when to advise your customers of your Terms of Trade.Why the assumptions behind the Late Payment of Commercial Debts Act1998 are wrong.The correct way to charge interest.

TERMS OF TRADE

You will undoubtedly have come across many instances where terms havebeen written in tiny grey print on the back of invoices. Aren’t they awful?Don’t you, like me, immediately wonder what on earth they are trying tohide? What sort of basis for any future relationship do they imply? Theyare indeed completely wrong on a number of counts.

First, terms have to be agreed between buyer and seller, at thetime the order is placed and accepted: the stage known as contractreview. They are part — and from the point of view of being paid on time,an extremely important part — of the agreement. What the customerwants, how the product or service is to be supplied, and when it is to bepaid for.

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It is therefore obvious that to introduce terms of trade only when theinvoice is raised is pointless. At that stage in the proceedings they canhave no bearing on the original agreement. The invoice is not part of thecontract. It is simply part of the delivery mechanism. That does not, ofcourse, gainsay including a reminder of what had been agreed, on orwith an invoice.

Secondly, there is absolutely no point in having Terms, which have afterall been designed to govern an agreement, presented in such a form thatat least one of the parties cannot read them. If it comes to the crunch anda deal goes sour, ending up in court, there must be a very strongargument that they had been deliberately created in that way, with anintention to mislead.

The same argument could hold in respect of both the number of clausesand the manner in which they are laid out. Fifteen, twenty, thirtyclauses, with the really important ones hidden away in the middlesomewhere: have you ever been defeated by boredom, trying to find theimportant bits amongst all the jargon? Exactly.

All of this creates an impression of a devious company with something tohide. If you are intent on being paid on time, all the time, you have to setyour stall out in such a way as to be perfectly clear and straightforward.Remember, the creation of misunderstandings and fudging ofissues presents any would-be slow payers with all the classicingredients for successful delaying tactics.

Finally, all those clauses! Lawyers, who used to be paid by the clause, stilllove making a meal of standard terms, but from most practical points ofview they should be presented on one separate sheet and kept as simpleas possible. In view of the verbosity of much accepted practice, it isextraordinary just how simple, “simple” can be.

1.Goods remain the property of the seller until paid for in full.2. Signed order signifies acceptance of terms. [See Module Seven.]3. Standard terms are for payment on delivery. Where credit terms

have been agreed, payment is due by 20th of month followingdate of invoice. [See Module Six.]

4. Right to charge interest on overdue accounts.5. If part of customer’s account is overdue, whole of account

becomes immediately payable on demand.6. Complaints should be in writing and raised within (say) seven

working days of delivery, i.e. promptly in relation to your type ofbusiness.

If you export, you will need to say that the contract is governed by Englishlaw and subject to the jurisdiction of the English courts.

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If you deal in intellectual property, software and so on, you will need totake very careful steps to ensure that large companies do not steal yourideas. They often will if they can. In those circumstances you will needsome specific legal advice.

The object of these clauses is fairly self-evident.

Clause one allows you to reclaim the goods, not only from the customer,but also from a liquidator. (One of our objectives is to try to reduce thelikelihood of this eventuality to nil, but nothing in life is guaranteed.)

Clauses two and three we shall examine in detail later.

Clause four is important because it is widely misunderstood. Indeed, thedisastrously wrong message is now enshrined in The Late Paymentof Commercial Debts Act.

The correct clause should simply state that the seller has the right tocharge interest.

It is completely wrong to add any more than that. The reason for this isthat we, as sellers, do not in the least wish to have any late payments inthe first place. The relationship we wish to cultivate with our customers isone where we never have reason to consider charging interest.

Once this clause contains any mention of interest rates, even thoughthose are supposed to be penal, the customer will compare the cost ofborrowing from us with what he is being charged elsewhere. As aninteresting exercise, ask your own bankers what they would charge for acompletely unsecured loan, over and above your agreed overdraft limit. Inrelation to their answer, the statutory rate of eight per cent over base willsuddenly appear distinctly less penal, I promise you.

Put this in context: banks are in business to lend money. That is whatthey want to do.

We, on the other hand, are desperately trying to avoid doing any suchthing, and yet, if we quote interest rates, our message to ourcustomers will become precisely the same as that of the banks.

Absolute madness! Don’t they think at all, these politicians?

Clause five is simply to prevent a customer fooling around, paying indribs and drabs, but always owing substantial overdue sums.

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Clause six prevents the common wheeze of not paying an invoice andraising the query about it only after it is well overdue, so gaining furthertime while the complaint, if it exists at all, is being sorted out.

Recap: Core Message for Module Two.Your Terms of Trade must be clear, simple and legible and presented up

front. They govern your subsequent relationship with your customer.

Exercises for Module Two

1. Give two reasons why barely legible terms are likely to be detrimentalto your business.

2. How many standard clauses are necessary for normal trade purposes?3. List five ways in which terms of trade should actively help your

business.4. Why should your terms never state an interest rate for overdue debts?

Your Notes and Answers to Exercises

1.

2.

3.

4.

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Module Three

You will learn:How to choose your customers: why only the best will do.Long term market strategy: the best of both worlds.Why you must vet all your customers.

THE MARKET AND CUSTOMERS: CREDIT POLICY

The Cake and the Double Whammy

You first have to have some method of deciding which customers you areprepared to offer credit to and indeed, why.

Look at the reasons why, first.

Obviously it makes sense to avoid providing any credit facilities to anycustomers at all, if that is feasible, unless that provision creates sometangible benefit in return. There are plenty of trades where it is quitenormal for payment to be in advance, or on delivery, or at least partly inadvance. Do not give away any of that built-in advantage without a clearunderstanding and measure of the corresponding benefit to yourself.

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Case Study:-

Restaurants normally exact payment before a customer leaves.Yet many will willingly provide credit account facilities, if askedby regular customers. Would that customer go elsewhere if therequest were to be, politely, refused? Probably not, if he thoughtthe quality of the food and the prices represented good value formoney. Businessmen, entertaining their customers use theargument that they dislike flaunting cash and there are problemswith the revenue over benefits. The answer for the restaurant isto take credit cards. They have a cost, certainly, but providesecurity in return. The brutal truth in those circumstances is thatcredit account customers expect to pay later than the statedterms. That involves, not only the cost of interest on the moneyand the real risk of picking up a bad debt, but also the extrawork of sending out invoices — all for an extremely doubtfulextra return. Much cheaper to provide the customer with thekudos he seeks of being regarded as a “regular” by rememberingto address him by name and adding the nicety of: “Your usualtable, Mr. Jones”.

Many trades involve the supply of a mixture of materials andlabour, or of development or design costs, or some element thathas to be contracted out. It is not the least uncommon to ask forpre-payment to cover that outlay, in advance (even when youyourself don’t actually have to pay the sub-contractor up front).It is extremely important not to overlook the opportunity.

In any business where the quality of workmanship will be judgedat the end of the job, the customer will expect, quite sensibly, anelement of retention until he is satisfied. The quid pro quo is toask for stage payments. There is considerable scope to loadthose in the supplier’s favour.

The whole point of these few simple examples is to emphasise that it isoften surprisingly easy, given a little thought and ingenuity, to avoidproviding credit, even in business sectors where trading on credit is lookedupon as the norm.

If it is possible to avoid selling on credit, do so. If it is possible to reducethe proportion of credit within a sale, do that.

Also, see if it is possible to cement payment more securely into place bythe use of Standing Orders or Direct Debits. Could you do that for at leastpart of the payment and then issue a “topping up” invoice for the balance?

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Note: Always give a reason and, if possible, find a balancing

benefit to provide for the customer in return for asking for earlierpayment.

Case Study:-

I was standing in the usual slow moving queue at the PostOffice. A distraught looking, foreign lady rushed in and begantrying to barge her way to the front. Everyone‘s response waspredictably stroppy. She then stammered tearfully in brokenEnglish that her baby was very ill. She had tried to call anambulance ages ago, but nobody came. Now she urgentlyneeded to draw some money to pay for a taxi to get her baby tohospital as it seemed much worse. Three of the men nearesther in the queue immediately offered her a fiver.

In looking for a benefit, try to find something that in effect costs younothing. For example, when you buy a copy of this training manual, youwill automatically qualify to obtain our Training and Skills Matrix™ at halfprice. After the initial set-up and print run have been covered, the physicalcost of each extra copy is negligible. The (considerable!) value is in theintellectual property.

So much for why you should, or should not, provide any credit facilities inthe first place.Now consider, which of your own customers you would choose to supplyon credit if you were forced to do so? How should you set about sortingthe sheep from the goats?

The greatest mistake, common to nearly all smaller companies, lies inhaving totally the wrong attitude to this proposition. When a potentialcustomer wishes to place an order and assumes that payment on accountwill be acceptable, most salesmen naturally want to say, “Yes”.

That sounds normal and logical: we are in business to make sales, afterall, aren’t we?

Only provided the sale is paid for. Not otherwise: remember my friend inthe introductory environment. A sale is not a sale until you have thecash.

A more constructive attitude, in the long run, is to think of one’s marketas a cake.

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Think of your market as a cake.

More conventionally, draw a pie chart of what you consider to be yourproportion of your market. Your segment, even if you were a substantialcompany, would be extremely slim. As a small company it will be tiny. If,for example, you estimate that you have eight per cent of your market, ona clock face that is slightly less than the segment between one o’clock andtwo: a tiny slice rather than a hefty chunk of my cake.

Now there are good customers and rotten ones in every marketplace.There are those who pay on time, who understand the value of what yousupply, and those that don’t. There are some companies, whichdeliberately set out to delay settlement and procrastinate in order to hangon to their cash for as long as possible. If you were able to choose the sortof customers you would prefer, which would they be?

The answer is pretty obvious. And I have good news for you: you canchoose.

In terms of your market as a cake, your slice may not be very thick, butyou may choose a slice with the thickest icing and a candle andHappy Birthday written on it.

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A slice with thick icing and acandle.

However, that freedom of choice involves acceptance of the contrarydiscipline that you have to learn to say, “No,” to second helpings, or it willall end in tears. Nothing has changed since you were a child. Being toogreedy will still make you sick. Galling as it may be to have to admit it,Mummy was right.

Back to business: just consider the realities of this approach a momentlonger. Suppose you have only customers who are lovely to deal with andalways pay on time. What happens to all those others that, frankly, hadyou known about them, you wouldn’t want under any circumstances?That’s right; they have to go to your competitors. Do you think thatwill that help those competitors? No, not on your Nellie, it won’t!

Lo! And behold, you are creating a double whammy situation. You wintwice over.

I promise you, it works. Not long ago I deliberately gave away my twobiggest customers in one of my businesses.

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Case Study:-

The first was a big plc. The buyer always looked simply for thelowest possible price. They had, naturally, had a significantquantity discount, but eventually our continuing to meet theirprice demands would have meant that we were doing no morethan covering our wage bill in order to work for them.

I made sales and production managers check the arithmeticcarefully (several times!) with our accounts department. Thenwith some trepidation, we declined to meet the prices theydemanded, so they took their business elsewhere. What theydiscovered, of course, was that they could get the job done atthe price, but not the service that went with it. They hadpreviously placed no value on our willingness to meet theirdeadlines and their frequent, last minute, rushed orders.

In due course they were forced to come back to us with those oftheir jobs that were either more technically difficult, or mosturgent. They now paid us the full price for these. The effect wasthat we now made a good profit working for them, but neededonly 25% of our previous turnover to do so.

Case Study:-

The second company was simply dishonest. They made an artform of losing documents or querying invoices. Not all of them,but enough so that they always had an excuse for not paying ontime. Our staff spent their time searching through past files andcorrespondence to settle their queries or replace missingdocuments.

In addition, their cheques had to be signed by two Directors, oneof whom, conveniently for them, spent much of his life abroadbuying product. They were very polished and subtle about notpaying: “You wouldn’t expect us to pay when the documentationdoesn’t seem to tie up with your invoice, would you?”

I was eventually forced to put my cards on the table: “We don’tever have similar trouble with any of our other customers. I’mafraid I’m going to have to put the price up to cover the extrasecretarial work involved on your behalf, and we will be unableto accept any future orders until your account is fully up-to-date.”

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I did not accuse them of lying. I did have to choose amoment when they didn’t owe us too much money: and theypredictably enough took several weeks to settle the smallamount they did owe us at the time.

The double pay-off in this case surfaced when we heard in duecourse that their paper chase escapades were throttling ourcompetitor to whom they had turned. How did we discover this?Because our competitor’s service had deteriorated to such anextent that several of their other customers now came to usinstead.

At first sight this might seem to take courage. True: it does, or it did atthe time. In fact it should simply be a matter of common sense. There isabsolutely no benefit in working for a customer on terms that do not makea satisfactory contribution to your profits. Not only that: late paymentleads inevitably to a greater risk of becoming a bad debt. A bad debt is theultimate no, no: you never get paid.

So, once you have digested the concept that you can, indeed you must,select your customers. Module Four describes the practical selectionprocess.

Recap: Core Message for Module ThreeNever be afraid of turning away rotten customers. They will repay you by

disrupting your competitors’ businesses.

Exercises for Module Three

1. List six benefits of not trading with a poor customer.2. Draw a watch face pie chart and enter your company’s

market share.

Your Notes and Answers to Exercises

1.

2.

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Module Four

You will learn:Four reasons why you should check all credit customers.What essential information you must have about each customer.The practical way to analyse status reports, simply and effectively.Two over-riding reasons why you should not ask banks for statusinformation.

VETTING AND ANALYSING CUSTOMERS

First, you must have factual information about all your new customers,before you provide them with credit facilities. Fortunately, technology hasmoved strongly in your favour to make this easy. Do not be misled by anycompanies you come across that have failed to move with the times. Donot waste time asking for trade references, unless there is no other way toobtain information, e.g. maybe, in the case of sole traders. Similarly, donot waste time asking a bank to provide references.

Credit reference companies now provide a service that is so cheap andfast that any company can well afford to check the status of every newcustomer, except when your product range dictates insignificant saleslevels to a high number of customers. Even then it is well worth knowingabout a new customer, however tiny the first order: who is to say thatorder will not have come from a relatively substantial company, towardswhich you would certainly wish to direct further marketing effort, or acompany deliberately trawling to monitor your quality of response?

Speed of information is essential. You cannot afford to keep a newcustomer waiting while you come to a decision. Fax and e-mail servicesprovide same day reports as routine. Nothing less will do: you owe thatlevel of support to your sales staff.

The other two factors that will feature in your choice of credit statusinformation are price and a more detailed back-up service. Referencecompanies, naturally, tend to try to sell you greater detail, as routine,than you really need. Negotiate a better price for two information sheetsonly. Sometimes you will need more comprehensive detail, but again itshould be at a reasonable price and speed.

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As an aside, the reason I am so positive that information from clearingbanks is not worth the paper it is written on is that I once asked our bank(I have since moved!) about a company that I knew to be bankrupt. Theysaid it was properly constituted and that the directors wouldn’t committhemselves to anything they couldn’t support. Utter drivel: the banks arethe last to know about their customers’ difficulties.

Happily for us, competition between credit reference companies isextremely fierce, mostly fuelled by developments in the application ofelectronic technology. Financial information about your customers, as wellas changes to their situation, can be in your hands within seconds of itbeing in the public domain. Do select reports supplying automaticupdates and including creditor days against that industry average.

You need to be aware that the way in which reports are presented variesfrom company to company. It will be worth your while taking the troubleto find one that best suits your particular trade and circumstances. Followthe links on the bepaidontime website: we are regularly in contact withcredit reference companies and try to point you in the direction of thosethat seem to offer a combination of value for money with the mostefficient, practical packages for SMEs. Also, as a customer of ours, we wille-mail you from time to time with significant updates.

Although company reports can be as detailed as you want them and atechnical risk assessment may be provided, you still have to learn toanalyse the information for yourself. (It is the same as when using anelectronic calculator: even though it does all the work for you, you have tohave some idea in your own mind if its answer makes sense.) It is yourmoney at risk, remember, not theirs, so you are perfectly entitled, andmight be entirely correct, in taking a different view. Also, a company’sfinancial status can change frighteningly quickly, so recent trade rumours,or your own grass roots information, might legitimately and correctlycolour your opinion. I dare say you and I would have happily set up creditarrangements for Marconi in January 2002, but perhaps not so cheerfullysix months later.

The information provided should enable you to see:-a) That the customer has the cash available to pay your invoices.

Don’t forget that the credit needed for each customer will betwice the amount of expected monthly sales.

b) Trends: if their situation seems more likely to improve infuture or to get worse;

c) Your own degree of risk / supervision likely to be required.d) The names of the directors.

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Credit reference agency reports are based on accounts filed by law atCompanies House. You can in fact obtain them free of charge if you haveall the details correct. But occasions might arise when you wish to obtainthem yourself, or you may have one of your customers give you theirs. Sowe should just spend a few moments looking at the salient features of abalance sheet and P&L account.

Example of a simple company balance sheet

2002 2001

Fixed AssetsLeasehold property 245,000 265,000Investment in subsidiary co 63,000 63,000

308,000 328,000

Current AssetsStock 82,000 93,000Trade debtors 42,000 37,000Prepayments 13,000 12,000

137,000 142,000

Current LiabilitiesTrade Creditors 51,000 63,000Accruals 2,000 2,000Amounts due within one year 38,000 51,000

91,000 116,000

Net Current Assets 46,000 26,000

Total Assets less Current Liabilities 354,000 364,000

Represented by:Capital and ReservesBank Loan 180,000 200,000Called up share capital 50,000 50,000Directors’ Loans 47,000 47,000Profit & loss account 77,000 67,000

Shareholders’ Funds 354,000 364,000

There are various ratios derived from the figures, which the professionalsuse as standards to help answer these questions. You do not need to be aqualified accountant to understand, or use them, whatever the boffinswould have you believe. Logically, the focus is on your customer’savailable cash with which to pay your invoices, so what do we need to lookat most importantly?

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Clearly, we wish to see that the business is both solvent and profitable.However, that is not much comfort if the company would have to sell itsfactory to pay us. So look at Current Assets against Current Liabilities.

If current liabilities, CL, exceed current assets, CA, then the CA/CL ratiowill be less than 1, or shown in brackets. In that case where will themoney come from to pay us?

So, for our purposes Current Assets must exceed Current Liabilities.

But be aware that the situation might still actually be worse than itappears, even given a positive CA/CL ratio. That is because Current Assetsinclude stock — which might be overvalued or unsaleable. A company’sstock figure could include goods which, because, for example, of a changein technology, or a cancelled order, might only be saleable at a significantdiscount. Some indication will be provided by the relation of stock level toturnover: is it a consistent percentage of sales, or has it gone updisproportionately compared with the two previous years? Also, does itseem sensible in the context of your own industry?

More stringent still is the Acid Test: Cash + Trade DebtorsCurrent Liabilities

That is nearer real cash. But there are no absolutes: how secure arethose debtors? What is today’s workshop about, after all?

In respect of all the information provided, one thing you always want tosee is whether the position is improving or declining over the three yearsshown. So always look for trends. When you think about it, trends mayin many ways be more important than just the latest figures inisolation.

Next, what about the company’s payment record? Do not ignore the largeplc customer, who is very often in a strong position shown by this end-of-year snapshot. If it is likely to become a significant customer it is worthobtaining its published accounts. (Just ask for them). The point here is,not the risk, but a plc using its clout to delay payment. What the publishedaccounts now have to show you, but which the snapshot may not, is thespeed at which the plc pays its creditors — that means you.

The ratio here is: Trade Creditors x 365Turnover

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The answer gives you an indication of the thickness of the walls you mighthave to break down in order to get paid on time. If they pay everyone atthe end of each month following the month of invoice, the answer will beabout 45 days. Allowing for legitimate queries and inevitable interruptions,60 days would not seem altogether unreasonable, would it? If that is thecase, it should not be difficult to lever yourself to the front section of thequeue, among “the 45 dayers”. In fact the Companies Act now requiresplcs to publish in their annual report the average days taken to pay theirsuppliers. The Federation of Small Businesses has also begun publishingname-and-shame league tables showing the average payment times ofplcs.

If a report is awful ask yourself (and the customer!) why on earth youshould expect to be paid on time ahead of the others.

You can keep a check on the efficiency of your own business in collectingthe cash, using the same ratio, but substituting debtors for creditors.

Your own collection period will be:

Trade Debtors x 365 = DaysTurnover

If you can collect your debtors in 45 days while paying your creditors in 60days you will be ahead of the game. It’s a small world, though: you willseldom do yourself any favours in the long run by gaining the reputationof being a bad payer. Once you have understood and mastered the stepsinvolved in creating truly productive customer relationships, it will becomeequally obvious that it is worth maintaining good relations with yoursuppliers as well. They can choose their customers too! That meansarranging to pay in 60 days, not just breaking your previous agreementto pay them earlier. If your suppliers are content for you to pay themmore slowly, so much the better. Re-consider what we said about the quidpro quo for stage payments. When the boot is on the other foot and youagree to pay part of an invoice up front, or early, ask to delay theremainder.

The information you need about customers is not so readily available inrespect of partnerships or sole traders. Bear in mind the following. Inasking to see their accounts, you are effectively asking to look at theirpersonal pay cheques. The information is extremely confidential.Diplomacy and tact are required.

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In this case you may well have to ask for trade references. The problemwith trade references is that is that it is very dangerous nowadays foranyone to put in writing anything negative about a company. Youtherefore need to telephone the referee(s) and try to obtain a betterflavour, off the record, behind the written information. Speak to as manypeople in the trade as you reasonably can. When you do obtain tradereferences, try to find some referees other than those selected by yourcustomer himself. He is clearly going to try to offer you only those whomhe thinks will respond in his favour. Make life easy for respondents withprinted forms, tick-boxes and pre-paid envelopes.

Name and Address of Business………………………………………………………….How long known…………………….years……………….. less than one year?What terms?...............30 days…………….. 60 days……………….longer?Monthly sales < £1000………… £1000-£5000…………………..over £5000Payments prompt?....................... 30 days late?.................Later?Name of payments contact…………………………………………………………………Is there any other useful information you can help us with, please?…………………………………………………………………………………………………………….…………………………………………………………………………………………………………….…………………………………………………………………………………………………………….…………………………………………………………………………………………………………….Thanks for your assistance.

Also, you might like to consider the following pointers:

The safest way of trading is through a limited company: limited liability forthe boss. So why don’t the owners of the business take that option? Mightthere be a particular reason for them not to trade as a limited company?

Pay attention to the number of years they have been in business. Whatwere they doing before? There has to be at least a possibility that theywere formerly directors of a failed company, or have been banned.

There is regularly published the Register of County Court Judgements. Ifyou are seriously concerned about your existing or potential clients, havea look at that or use a company specialising in that information.

It is not all bad news.

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Case Study:

One of my own favourite customers was an idiosyncratic high-fi buff who was a globe trotting multi-millionaire. He neverdivulged any financial information he could possibly avoid, butpointed several of his own trade contacts in my direction,every one of whom became an excellent customer as well. Onecould hardly ask for better than that. I like to think that herecognised that we asked responsible questions in aconstructive manner.

The 80/20 ratio, that crops up so unerringly in business generally,indicates that you are likely to be prepared to provide credit for 80% ofyour customers, based on the briefest information provided by the agency,although some of them you may wish to keep under closer surveillancethan most. Importantly, you now know who those are.

Discuss with your accountant the overall level of your debtors in relationto the strength of the rest of your Balance Sheet. One common rule ofthumb calculation is that no single debt should amount to more than thelower of 10% of your net worth (shareholders’ funds), or 20% of your netcurrent assets. This is another way of saying it is extremely dangerous tobe reliant on one big customer.

If you are just starting up a new company, you have a clean slate to workfrom in the process of vetting customers. Those already in business havea more rigorous programme, which simply must be followed correctly,step by step to clean up the debtor schedule and bring the difficult casesinto line, without causing offence.

Surprisingly, as we shall see in Module Five, this too can be done in such away as to improve customer relations, rather than damaging them.

Recap: Core Message for Module Four.You must obtain status reports on every new customer.

Exercises for Module Four

1. Give four reasons why you should credit check all customers.2. What four items of information must you have in order to make

a credit judgment?3. What is the Acid Test?4.How might a stock figure be stated as higher than its realizable value?

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Your Notes and Answers to Exercises

1.

2.

3.

4.

Module Five

You will learn:How to ask customers about their accounts and have them think better ofyou for doing so.How to refuse to provide credit and retain a happy customer.When not to provide credit facilities.What you must remind, and keep reminding your own staff.

HOW TO ASK CUSTOMERS ABOUT THEIR ACCOUNTS

In respect of the likely 20% of your customers for whom the agency’sinformation is inadequate, or surprising, a friendly phone call is the nextstep.

You speak only to the Managing Director, or the Finance Director.Never ever query your customer’s financial status with one of theirstaff. That is extremely rude and could be seriously damaging.

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Just think of the effect on your own staff if the boot were on the other footand one of your suppliers rang to say that your accounts looked worryingand they weren’t keen on allowing your company any credit. That staffmember has perhaps never seen the published accounts; most probablywouldn’t fully understand them in any case; can’t comment usefully onthem and now thinks your business is going down the pan. He or she willbegin to consider looking for alternative employment, having first voicedtheir concerns with a few work-mates and family. Some of the latterhappen to work on the same industrial estate and before long yourlandlord is worrying: hardly a sound and friendly basis for establishing along and fruitful trading relationship.

You will find the names of the Managing Director and Finance Director onthe Agency’s report.

Essential Format:

“This is Ted Rose of McQueen Rose Limited. As a matter ofroutine we are sent an annual search report on all ourcustomers” [or] “a credit reference agency report on all ournew customers for whom we wish to set up a credit account.As you will be aware your (200…) annual accounts looksomewhat unusual in that....... Can you help me, please?”

I cannot emphasise too strongly the message that your creditcheck must be presented as being absolutely routine and bears noimplication whatever about the credit worthiness of the customerto whom you are speaking.

Note also: I call it an agency report, not a credit check, which would

sound as though we doubted their integrity. Just consider the ‘warning off’effect on you of the words, “subject to status”, at the end of all thosesupposedly wonderful television special offers.

The customer’s answer in nearly every case will be quite valid andunderstandable: something odd happened, a one off occurrence. Theircompany has been taken over, or technically re-structured in some way.This presents you with an opportunity to enquire how things areprogressing as a result and whether you can re-package your owncompany’s offering more appropriately for their changed circumstances.

Your credit check enquiry has been turned into a friendly,constructive, sales call.

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Many foreign owned companies are deliberately financed to create profitsat home, rather than in the UK. Apart from tax differences, it stands toreason that they will normally have incurred more costs at home to offsetagainst income. The parent’s guarantee of support is all that underpins anotherwise weak UK balance sheet. You must obtain that guarantee, if it ishumanly possible, even though, when push comes to shove, it may beworthless. It is all too easy for a foreign company to jettison an overseassubsidiary which isn’t performing, or if the parent Board decides on somenew strategy.

Again, just as when making enquiries of UK companies, look for ways inwhich you might be able to enhance your offer to them. There are plentyof opportunities for smoothing commonly encountered barriers tointernational trade without undue effort. Look to nullify time differences,distance, or language problems. Electronic technology, video conferencing,e-mail and so on can work wonders given a modicum of thought.

When not to give creditMore often than not, your customer actually thinks better of you for goingabout the business of establishing credit status information in aprofessional way. So long as you behave with a duty of care attitude andavoid any impression of arrogance, you will enhance the image of yourcompany. The customer’s subconscious thought will be that if you are wellorganised in one aspect of your business, chances are you will be equallyefficient in other areas, such as delivering your product or service.Reinforce this by explaining that your reason for attention to suchdetail in setting up credit facilities is precisely so that you canconcentrate wholeheartedly on delivering your product or service.It is entirely in the customer’s interest.

One of the most common danger signs is that the information atCompanies House is out of date. A company doing well tends to want tohave its accounts published as soon as possible and advertise its success.Those with disaster written all over them will naturally delay, aiming toshield their dilemma from public scrutiny for as long as possible.

The open response to your natural enquiry about their accounts being outof date will be to offer to fax you at least their latest, audited balancesheet. If everything is reasonably satisfactory, that is all you need to see.

Every now and again the response is less than fully open and constructive.Alarm bells should be ringing and red lights flashing on your mentalcomputer screen. If the answer is anything other than an equallyprofessional understanding of your situation, watch out! You have beenwarned. You have been warned, not by me, but by the customer himself!He is strongly advising you not to provide him with credit.

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You may still want him as a customer, but on your standard terms, whichyou will recall are for cash on delivery. So your next move has to be to tryto find something to offer to show that you want him as a customer, thatyou are not deliberately putting obstacles in the way. The aim must be todemonstrate, not only your professionalism, but that your service will beeven better than he expected.

There is a whole range of sweeteners you can offer: light at the end of thetunnel and improved delivery of your product. “You’ll be aware how carefulone has to be these days. May we keep you on Pro-Forma terms [untilyour next accounts are out] or [until we’ve worked together for sixmonths]? In the meantime [we won’t cash your cheque until your goodsare ready / we’ll process your order faster / we can give you a discount forcash in advance].”

Note: do not offer a discount for prompt payment, which is different and

very dangerous. [See Module Six.]

A word about exportingQuite clearly, it is even more important to secure arrangements forpayment of exports than on the home market. Fortunately, any reputableimporting customer will recognise this. The techniques for securingpayment are well established and widely available through your bankers.There are two words of advice only. One, use export guarantees at theoutset. Two, be sure that you have extremely valid reasons for desertingletters of credit.

A final reminder: all this credit checking is always worth while because

your sales efforts will then be concentrated only on good customers. Youwill never be wasting time on rotten prospects that can’t pay. Everyone inyour organisation should cheerfully acknowledge that a sale is a sale onlywhen it has been paid for.In Module Six we shall set about making it as easy as possible for thecustomer to pay.

Recap: Core Message for Module Five.Ask customers about their accounts in the same low key, perfectly routine

terms you would expect them to use to you in similar circumstances.If their answers are not open and helpful, heed their warning.

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Exercises for Module Five

1. To whom do you speak?2. How do you know their names?3. List three danger signs.4. Suggest three sweeteners possibly applicable to your own company.5. Name two security tools for exporters.

Your Notes and Answers to Exercises

1.

2.

3.

4.

5.

Interlude

How we used to do it.

We had a major plc customer who always paid us late. One of mycolleagues, who was responsible for their account, had the bright idea ofsending them a cheerful note suggesting it might be wise to pay on timein future and he enclosed a spoof photo of our new credit controller.

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“Our New Credit Controller”

Back came an equally civil letter from the plc’s buyer, saying that it hadbeen a great pleasure to meet our new credit controller, particularly for hisManaging Director.

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He enclosed this photo:-

“Your charming new credit controller after her meeting with ourManaging Director”

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My colleague promptly replied, saying that he felt very guilty for havingomitted to mention that our new credit controller was married:-

“Our new credit controller’s husband negotiating with arecalcitrant payer”

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Module Six

You will learn:

Why “30 day terms” are the road to ruin.The answer to the credit conundrum: why 45 days ensure payment soonerthan 30 days.Why 35 days are best of all.How the dreadful job of chasing overdue accounts changes into that of afriendly quality evaluation to ensure the customer is delighted.How to gain an entire month’s advantage in resolving anyproblem/complaint a customer might have.The advantages and dangers of discounts: for cash, for prompt paymentand retrospective.

“30 DAYS” — THE ROAD TO RUIN

Every company that trades on 30 day terms will inevitably haveproblems with late payment of their invoices.

Before we examine the reasons for this, please ask yourself the question,“Thirty days from when?”

The invoices from those companies which use these terms commonlystate, “30 days, net.” Net simply means without any deduction ordiscount. Sometimes the 30 days stated means from date of invoice. Theycan also be from receipt of invoice. Again, they may sometimes be fromthe date the job was completed. We will consider this little matter again ina moment.

Why do I insist they are so iniquitous?

First, inevitably, some of those deadline dates will fall on Saturdays,Sundays, or Bank Holidays. What is the intention in those circumstances:payment in 27, 28, or 29 days? In reality, of course the customer alwayspays, at best, during the following week. So there is a mutually agreed,built-in, late payment factor, not mentioned, but clearly understood.

Second, virtually all companies of any size have payment systems thatoperate on the basis of one or two cheque runs per month, or per week.They do not have systems for identifying, and then paying, large numbersof small amounts on every day of the month, to accommodate all theirsuppliers’ 30 day invoices.

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This means that no supplier to those companies is actually trading on hisown “30 day terms” at all. He is trading on the purchaser’s terms. Whoknows what they may be? 60 days? 90 days? In reality, when the suppliercomplains of late payment, he may in fact be being paid reasonably totime, according to the purchaser’s terms.

That supplier, because he has accepted the purchaser’s terms by default,or usage, does not have a leg to stand on in law. No purchaser is going toshout about this state of affairs, but it does permit him to ride roughshodover the supplier’s supposedly agreed terms. This alone is a sure source ofmany accusations of large companies unfairly abusing the weakerbargaining position of small companies. Naturally, any supplier who hasn’tbothered to think about workable terms for his customer lays himself wideopen to abuse and bullying.

Third, the supplier’s accounts department, when they telephone to chasepayment, do not actually have a clue when that invoice is due. They don’texactly know when it arrived in the buyer’s hands. Which post did it catch?Was it stamped first or second class? Will it have been entered in thismonth’s purchase ledger, or next?

So precisely what sort of telephone conversation will the two accountsdepartments be having? It will certainly not contribute to the supplier’simage of excellence and efficiency in the opinion of the customer. Ineffect, the supplier is saying, “You have our invoice there, I hope. Whenwould it suit you to pay it, please?” In practice it is almost impossible tohave payment confirmed before it is due.

The only correct procedure is to agree for payment to be by theend of the month following the date of issue of the invoice.

It remains essential that invoices are issued as soon as possible after eachjob is completed, because customers will continue to play the game oftrying to slot month-end invoices into the following month.

However:

The payment terms will now accord with every customer’s cheque runarrangements.

The supplier can now ring the customer before the payment is due, notwait until it is overdue before he can do anything.

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The relationship between accounts departments is now completelydifferent, because the previous chasing of overdue accounts impliedblame. In contrast: “I’m just ringing for confirmation that the payment willbe in this month’s cheque run,” is perfectly friendly and reasonable. It isno longer a call to chase payment, but first and foremost a quality checkthat the service or product has been delivered to the customer'ssatisfaction. It dovetails perfectly with the company’s CRM objectives.

If, for any reason, the expected payment has not been scheduled, theproblem can be identified in advance. Again, on 30 day terms, the processof rectifying problems that will have already resulted in withholdingpayment is not helped by the supplier’s suspicion that they could be adelaying tactic rather than a true problem. Now, if the customer has acomplaint, it can be identified, on average, some two to three weeks, evena month, earlier than before.

(Product supplied, say, 15th of month one; query now raised 15th of monthtwo, plus say, at worst, a week = 37 days. As opposed to previously,same date of supply, 15th of month one; no contact usually before the endof month two, then into week 1 or 2 of month three = 52, or 59 days.)

Once more there is a huge positive image bonus for the supplier, with theopportunity for prompt and positive rectification of queries. The fullimplications of this are seldom understood. Colin Barrow, Head of theEnterprise Group at Cranfield School of Management, quizzed members ofthe Institute of Directors: “What is the single most important reason forcustomers to defect to the competition?”

His own researched answer is: indifference to complaints.

Regardless of whether complaints are imaginary, concocted, or perfectlygenuine, on 30 day terms they will invariably have been allowed to festerfor a seriously damaging length of time.

Internally, the job of the person who once chased overdue payments hasnow been changed to routine, uncontentious contact with customeraccounts departments in a completely different vein. It may even becomefun for her (it’s usually a lady) to come to work each day.

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On the other hand, the theoretical credit period has now been extendedfrom 30 days to 45. The obvious answer to this is to change terms oftrade to payment by the 20th of the month following month of invoice.Even then, in explaining these latter terms to a customer, you will be ableto point out that you would still be providing an average 35 days credit,instead of the iniquitous 30.

In practical terms though, it has to be borne in mind that payment termshave always to meet the customer’s capabilities in order to be effective.So you may have to modify your arrangements in respect of thosecustomers with, for example, set cheque runs at the end of the month.

However, regularity is far more significant than the actual date ofpayment. In the case of a regular customer always paying, say, on thelast Friday of the month instead of the 20th, it is only the first paymentthat makes a difference. Asking for payment by the 20th merely providesan extra cushion, giving ten more days to ensure payment before themonth end. I found this most helpful at the outset, when we weredeveloping improved debtor management, which involved training ourcustomers while adjusting our internal controls as well.

[See Module Eight on duties and routines for accounts departments andsales departments.]

There will be measurable cost savings in clerk’s time, supervisor’s time,telephone bills, photocopying, postage, stationery, the time of seniormanagement travelling to try to extract money from late payers, legalfees, more management time.

The combined effect will lead to truly remarkable improvements in thereputation of the company among competitors as well as customers,leading to increased turnover from referrals. This becomes a companyeveryone wants to trade with, creating increased shareholder value. Thatreputation will also help towards making staff recruitment easier.

Finally, and perhaps most important of all, the M.D. can sleep at night!

All this follows simply from selling on workable credit terms — while ofcourse there will be more money in the bank. Wow!

Discounts for early paymentsPrompt payment discounts are dangerous and frequently createunforeseen problems.

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For example: “Less 1.5% for payment in 10 days”

Your customer then pays in 12 days, having deducted the 1.5%. Nowwhat? Are you prepared to have an argument about some fiddling amountlike 75p or a fiver, which will inevitably lead to ill will on both sides? Youare accusing him of cheating. He thinks you are being ridiculously petty,quibbling over such a tiny amount. Both of you are right. None of whichhelps contribute in the very least to the ongoing constructive, customerrelationship management (CRM) ethos you are trying to build, or to thereputation of your firm.

I wouldn’t mind betting that exactly the same will happen when companiesbegin to add supposedly penal, late payment interest to their invoices.

Case Study:-

When I was farming, we used to buy diesel fuel in bulk. Forsome reason, although the price had been agreed beforehand,the invoices always offered an additional, “less x% for paymentin y days”.

The first time, I deducted the interest, wrote out the chequeand envelope, then found I’d run out of stamps, and left theenvelope in the farm pick-up. It was by a perfectly genuineseries of errors that they received the money about 10 dayslate. What happened? Nothing. So then, thinking, “What idiots”,I played the game out of sheer cussedness and alwaysdeliberately paid late, having deducted the discount.

What is more, their rep. used to come round from time to time,enquiring about distilled water, or oil and offering still lowerprices if I bought 5,000 gallons at a time instead of 2,500. Henever once mentioned my unauthorised discount. Evidently,nobody had bothered to tell him I was a rotten customer. Why?Was it worth their while having a rep. in the first place? Not hisfault, but his visits meant that I thought less of that firm than Iwould have done without him.

Discount for cash, up-front, or in advance, is a completely different

matter. You have control. You are providing clear evidence of your goodfaith in that, by lowering the price slightly, you are balancing theadvantage to you of having the money earlier.

An apparently similar option is to agree to give quarterly rebates by wayof credit notes against invoices, provided that all that quarter’s invoiceshave been paid on time. The advantage to you, the seller, is that it iscomparatively easy to work out the post-rebate, net price in advance.

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Buyers will usually ensure that their accounts departments enable them toqualify for the lower price. Again, they can only do this if everyone knowswhat “on time” means. It is virtually impossible with 30 day terms, leadingonce more to accusations of duplicity.

Quite apart from anything else, though, discounts are extremelyexpensive. They have to be significant in order to grab the attention of abuyer and induce take-up. As an example, 1.5% discount for payment inten days, which doesn’t sound a lot, is the equivalent of 26% p.a. While2% for ten days is a whopping 36% p.a.Is it worth it? There can’t be many business situations where it would notbe far cheaper and more economical in every respect to ask for paymentby the end of the month following date of invoice: clear, clean and open.

Recap: Core Message for Module Six.Never on any account trade on 30 day terms.

Payment by the end of the month following month of invoice is correct; by20th even better.

Exercises for Module Six

1. Give six reasons why “30 day terms” invite disaster.2. List five benefits of asking for payment by the end of the month

following date of invoice.3. List three different types of discount scheme.4. For each of the above give one reason to beware.

Your Notes and Answers to Exercises

1.1.2.3.4.5.6.

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2.1.2.3.4.5.

3.1.2.3.

4.1.2.3.

Module Seven

You will learn:

How to explain four clear benefits to a customer of payment by the end ofthe month following date of invoice, instead of “30 days.”Why debtor management is for salesmen, not accountants.Why your debtor management centre is in the sales and marketingdepartment, not the accounts department.How to ensure you know the correct identity of every customer.The simple way to keep customer information as accurate as possible.Two supreme objectives from accurate paperwork.

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FACE TO FACE — THE SALES MEETING

Winning Orders and Contract Review

The first steps in establishing your practical relationship with a customerare to understand what that customer requires. Then to make sure youcan supply at the appropriate quality, to time and meet the expected priceparameters. Naturally, in addition to the price itself, payment terms are,in every case, an essential part of this process, technically known ascontract review.

From this it becomes abundantly clear that the first part of a salesman’sjob, having achieved that face to face (or telephone) interview, is to askquestions. In essence, how will the buyer judge excellence? Part of thetotal information pack and therefore part of the selling company’s totalservice offer must include the buyer’s preference for payment terms fromthe variety available.

The two most difficult aspects of a salesman’s job are asking for the orderand, even worse, asking for the money. By finding out how the buyer willjudge excellence, including his preferred payment terms, the salesmanlevers himself into the classic situation of being able to close:“If you are satisfied with the quality, and I can supply this quantity,guarantee that call off rate, and provide facilities for you to pay by thesemeans, may I have the order?”

Difficult for the buyer to refuse:-Quality,

Quantity,Timeliness,And Price.

The salesman must start from the understanding that the best terms arefor payment up front and move on from there, depending on the particularindustry. He is then able to offer to arrange credit terms as an additionalservice: “Would you like me to have a credit account set up for you?” Heexplains his company’s preference, but within the context of enquiringhow the customer’s cheque runs are scheduled, whether they actually payagainst statements rather than invoices and so on. He also uses theopportunity to discuss discounts for C.O.D., (not for prompt payment,note!) or split payments for smaller but more frequent deliveries; (easingthe customer’s cash-flow) all emphasising the totality of service and theconcept of, “Getting all the paperwork tied up properly so that we canconcentrate fully on meeting your real needs.”

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Most importantly, you will notice he does not say anything like, “Subjectto credit checks”, or mention limits. That will be for boss to bossdiscussion, should it arise, later.

Some powerful retailers routinely demand sixty, or even ninety, days’credit. Assuming this is an acceptable part of the deal, it remains just asimportant to translate that into, “Payment by the end of the second orthird month following month of invoice.”

Anyone with any experience of selling will recognise that having a written,standardised ordering and credit management system in place, andavailable for reference, makes life immeasurably easier. The requirementis for sufficient flexibility to meet your particular industry’s likely range ofsituations, but backed by a professional framework.

I repeat, this means that in order to provide the sales team with themaximum support, the selling company must have a written credit policy.

Sales staff will also be armed with Order Forms, Acceptance of Order,(which in practice usually means management counter-signing the order)and Credit Application Forms.

[Please see your pack at the end of the Modules.]

“All that paperwork: sounds way over the top for a small firm like ours!”The reality is that the forms can be very simple and each one of themmust be designed to help make a salesman’s life easier. Let me give a fewexamples.

Case Study:-

A waiter in a restaurant always writes down your order,together with a note of how you would like your steak cooked.He returns to say that they’ve run out of beans, would peas doinstead? Order and Acceptance of Order. If he has been trainedto write the order out in sequence, he will be able to serve eachguest the correct dish, without having to ask, “Was you thegrilled cod?” The actual food itself may not have changed, butwhat is your own reaction? If you are like me you will feel thatthe service is better, subconsciously expect to pay a higherprice and will probably leave a more generous tip.

Not only that: at the end of the meal, the customer actuallyasks for the bill. If he wants to open a credit account, he willexpect to have to talk to the manager in advance and at leastfill in his name and address: Credit Application.

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Builders make meticulous notes about a job at the outset anddo all the right things, commonly giving valid sounding reasonsfor some payment in advance. In spite of which they still end upin the Small Claims Court because, at some point during thework, the customer said, “While you’re here could you just………”Solicitors would lose half their business if builders stuck to theirrules.

Most often, of course, Acceptance of Order is an integral part of creatingthe Quotation in the first place. It is fundamentally important to realisethat it exists, nonetheless. It is just the high falutin’ names one doesn’trecognise.

The relationship between this process of contract review and late paymentwas made abundantly clear from a survey undertaken by the CreditManagement Research Group. [Credit Management, Late Payment and theSME Business Environment, 1997]

This found that of 500 small businesses interviewed, 52% did NOTformally agree payment terms with customers before the sale. Lessthan 20% had a credit policy. Compare those figures with the 48% ofcompanies in favour of charging interest on late payment and you begin tounderstand the emptiness of the clamour, I hope.

So the rule has to be: if you can, always get all orders in writing andsigned. Very often you can take a telephoned order and ask for faxed orposted confirmation. If that confirmation fails to materialise: stop work.You don’t have to be stroppy about this: “It is just to ensure that we haveyour requirements correctly understood, Sir,” or, “Would you mind justsigning this chit for me, please, Sir?”

There are two objectives in all this seemingly pernickety paperwork:-

One: ensure that you meet the customer’s over-riding criterion of quality,

whatever that might be, which enables you to charge higher prices.

Two: obtain absolutely correct details for invoicing, which will avoiddelays in your being paid.

This is why credit control is for salespeople, not for accountants. It issalespeople who set the scene and establish the initial relationship. Theentire management of a company’s debtors flows on from this.

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Case Study:

Lessons from an Enjoyable Interlude.We had a minor break-in some time ago. Not the enjoyableinterlude to which this refers! In the early hours of the morningwe called in an Emergency Boarding Up and Glazing Company.They came extremely promptly and provided an excellentservice. I would unhesitatingly recommend them.

Even more so, when their invoice arrived, the payment termson it stated, “Payment by return for Emergency Work”, whichseemed to be perfectly fair: prompt payment for promptservice.

The only thing was that their invoice was issued a full threemonths after they had done the job. I hope that they will havemanaged to stay in business if we ever need them again.

Have a smile, but note that they missed two tricks. Not onlywere they ages late getting their invoice out, but what is yourown attitude to paying your bills? You might delay paying theunimportant ones, but for an Emergency Service, you would beperfectly happy to pay immediately, wouldn’t you?

Certainly, they could not have been expected to prepare aninvoice in the middle of the night, but they had to return toreplace their boards with new glass and could perfectly easilyhave asked for the money then.

If you are in a trade with an emergency element, always obtain paymentthere and then. Your customer will still be most grateful, strangelyenough, more so. The reason for this is that you are reminding him of thespecial efforts you have made on his behalf.

Do any of you think: “Doesn’t apply to us, I’m afraid.”

Oh yes, I’ll bet it does! Almost every business has customers whosometimes have rush jobs, or emergencies, or crises of some sort. Theyalways provide the opportunity for you to charge a little more, or to bepaid sooner, or both. Don’t be greedy or take the Mickey. Do takeadvantage. Create an element of extra special care and attention to thatcustomer’s needs.

“Yes we can rush that job through for you, Sir, but I do have one smallproblem. You might be able to help me …,” or, “Charlie will have to workovertime,” or, “I’ll have to get extra parts biked over for which I have topay cash up front.”

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The more disruption you demonstrate while still meeting, or evenexceeding his needs, the better for your relationship.

The customer asks, “Would you be able to have that ready by Thursday?”

“We should be able to produce the first hundred by tomorrow evening.We could even get Bill to deliver them on his way home. It may be a bitlate though.”

Even if you cannot raise the price on this order, you will certainly be ableto on the next. There will not be much likelihood of your being paid lateeither.

Credit Application Form

We call it an Account Facility Form for the customer’s benefit, because

it sounds less threatening.

The details on the application form must be as accurate as possible so thatthey can be transferred straight onto the computer system for invoicing.The opportunity for error is greatly reduced when details have to beentered only once.

There is a serious benefit to the customer as well. That is an error-freetie-up between order number, job number and invoice number. Thecustomer can therefore obtain accurate information at every stage of the(manufacturing, development, or delivery) process about the progress ofhis order.

Note: There must never be any mention of a limit to his credit facility.

Should a customer ask about a limit, the answer is, “The only limit is yourability to pay, Sir.” [See Module eight.]

Note the following features about the form:[Please refer to your pack.]1. It has the full name and registered number of the company.2. It has the vat number and details of where invoices should be sent.3. It agrees to meet your payment terms.4. It is signed by someone with sufficient authority, if possible a Director.5. It ensures that the customer has your standard Terms of Trade.6. It ties in with the order form. [See your pack again.]7. You, and any covering letter asking for this, will be addressing the

buyer with whom you have been dealing, not the customer’s accountsdepartment.

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The buyer is your most important ally in the customer company’s camp.He is the one who needs your product or service and who negotiated thedeal with your sales department. All being well, he is the one who willwish to order from you again. Should there ever be any problem withdelay in payment, it will be very much in his interests to help sort it out:yet one more demonstration that the management of debtors is a salesfunction.

Recap: Core Message for Module Seven.Payment by the end of the month following month of invoice assists sales

staff.Well managed credit facilities and accurate customer information anchor

sales in place.

Exercises for Module Seven

1. List four advantages to a customer from payment terms by end ofmonth following date of invoice.

2. Name two objectives to be directly gained from accurate paperwork.

Your Notes and Answers to Exercises

1.

1.

2.

3.

4.

2.

1.

2.

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Module Eight

You will learn:One thing you should never tell customers.Why credit limits should be kept as low as possible.How to maintain control over credit limits.Positive contributions from the accounts department.Routines for the sales and marketing department.

CONTROLLING THE ACCOUNT

Internal Routines

You should never tell customers what their credit limit is, or indeedthat they have, or are about to have, any credit limit at all.

Credit limits are solely for your own internal control and on no accountwhatever should they be divulged to customers.

Consider for a moment your own reaction when your credit card companynotifies you of your new limit. It is either insultingly low, or stupidly high.In no case does it enhance your opinion of the card company.

Effective management of your company’s debtors dictates that creditlimits should be kept low, in order to highlight any increase in demand aswell as any late payment. Therefore, if you advise a limit to a customer,you will be actively dissuading him from expanding his business with you.After all, he doesn’t know why or how you arrived at that limit, or (maybe)that you would be delighted to increase it. Nearly every single one of mylarge customers started as small ones (customers, not companies). If theyhad been told they had credit limits the effect would have been to turnthem away, inviting them to go to a competitor. The very last thing Iwould want, given that we’d acquired and vetted them in the first place.

Remember that part of the object of the vetting process is to identifycustomers with the potential for further sales, or of a greater range of ourproducts.

One of the key imperatives in Module Five was that you must talk only toa customer’s Finance Director or Managing Director about their financialstatus. If you tell that company’s buyer that their credit limit is £xx, andremembering that £xx will be fairly low, you are bound to make himwonder why. So we are back to undermining relationships again, insteadof building them.

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You tell me why professional credit managers report a continuing livelydebate on the subject!

Internal Authorisation

Having decided on the terms on which you are prepared to trade with anygiven customer, it is absolutely vital that your efforts cannot be overruledby anyone else. You therefore need an internal authorisation form, even invery small companies, to record credit limits, or stating pro-forma only.

Modern computer systems can be written easily enough to lock out pro-forma customers from the credit A/C system. This is vital in order toprevent yourself providing credit to the very people you wished to avoid.

The credit limit serves 3 purposes:1. You decide how much credit, of course.2. The limit will be triggered by late payment.3. The limit will also be triggered by increased volume of business.

You must have credit limits for all customers and you must ensure that noone changes them without your authority. So your internal paperworkmust be signed by yourself, the boss. Your business will have grown to afair size, say £5 million turnover, or have a Finance Director, before youwill have someone commanding sufficient trust and with the necessarydepth of understanding for this to be delegated.

[Again, a suggested format is included in your pack.]

There are three ways a customer might hit his limit.1. He might not have paid his bills on time.2. His level of orders might have increased.3. Third, and most dangerously, both might happen at the same time.

By having a limit system, you are obliged to investigate and takeappropriate action in every case. If orders are increasing, you have theopportunity to ring, thank the customer and ask how you might help himstill further, while re-checking your underlying credit risk as you did at theoutset.

Duties and Routines for the Accounts Department

You have to develop a routine and stick to it. Actually obtaining paymentis just as important as doing the work for the customer in the first place;technically, more important.

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Your accounts department must fully understand this. One way ofreminding them is to refuse to pass orders for your own (less urgent)supplies until the cash is collected. That way the purchasing side of yourbusiness is helping with the credit control and your staff needing thosesupplies will know if accounts are doing their job properly.

The accounts department has to perform the following functions in regardto credit control. First, produce three sets of paperwork;Invoices, Monthly Statements and a Weekly Debtor Schedule.

Invoicing[A check-list sample invoice is shown in your pack.]

It is vitally important to double check that the first invoice to anew customer is absolutely correct:

Customer Name spelt correctly. Addressed to the Accounts Department correctly - (not to some

manufacturing depot). Marked for the attention of? Customer reference / order number, delivery docket. Date. Is the description of the goods or service the same as on the order

form? Are any printed terms of payment on your invoice the same as those

agreed with the customer?

The accounts department must put their heads together with the salesdepartment and thoroughly cross check this first invoice. It is imperativefor all your subsequent control of the account that the customer sees youas being utterly on the ball and professional. Once the first invoice iscorrect, the likelihood of subsequent errors becomes very small.

Even though yours is a two-man business, it remains seriously importantto get it right — more so in many ways. You don’t have the resources tosquander on rectifying mistakes later.

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Initially our relationship has been with the customer’s buying department.

His accounts department doesn’t know us from Adam. So send a pleasantcovering note with that first invoice: not a “Dear Sir/Madam, the highwaysdepartment apologise for any inconvenience caused by digging up theroad,” sort of letter, when we all know they don’t actually care a fig aboutus trying to get the children to school, or being late for that importantmeeting at work. Send a personal letter, marked for the attention of theAccounts Department Manager. The name is on the Account Facility Form.

He or she is about to become one of your best friends, after all. Point outthat you are a new supplier and that you want to make life asstraightforward as possible for him or her. Invite them to check the detailson this first invoice to ensure they reference the correct order and deliverynumbers. Include the name of the person in your company they shouldtelephone if they have any queries, giving phone, fax and E-mail address.

Remind them how, when and where payment should be made, eventhough it says the same thing (check!) on the invoice.

Although I remain utterly convinced that the quality of advice deliveredthrough the Better Payment Practice Group is astoundingly misdirected(being mostly concerned with chasing overdue accounts), I am equallysure that the concept itself is eminently sensible.

One of our own suppliers has recently impressed me by incorporating theBetter Payment Practice Group logo into its invoices. This immediatelygives the impression of a business that is dedicated to high principles ofethical practice. It also manages to convey the thought that if we fail topay them on time, we would be letting ourselves down by comparison,clearly demonstrating that we don’t qualify for membership of the same‘top companies’ league: quite clever. You should do the same on yourmonthly statements and even on your Terms of Trade.

The same goes for Prompt Payer. Find their link and logo on our website.Integrity and best practice: your customers will wish to be thought of asmembers of that particular club.

Make sure that you send out all invoices as soon as you possibly can. Thatmeans as soon as the goods are delivered or the service provided. MyScots blood makes me hate wasting pennies unnecessarily on first classpostage, but this is one time when it is entirely justified. There is no pointin your racing about sending out invoices right on the button, if you thennegate the entire effort by allowing the Post Office to deliver them at theirleisure.

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When a job for that particular customer is spread over several weeks ormonths, or has to be completed in sections — as it can well be, forexample in the building trade, or for solicitors — it becomes quite commonpractice to arrange for stage payments. It is almost equally common forsuppliers with that advantage to become sloppy about sending outinvoices as the job progresses. When you have been astute enough toarrange stage payments, it makes absolutely no sense to fail to enforcethem.

It will depend on your terms of trade, and your arrangement with thatparticular customer, just how serious the late presentation of an invoicewill be. Many suppliers charge about at the end of each month, sending offinvoices. Not only is this last minute rush likely to cause errors, andhence promote queries, thereby automatically inviting delayed payment,but the more astute of your customers’ accounts departments willroutinely enter those end-of-month invoices in their bought ledgers as atthe start of the following month. They then innocently claim that theinvoice isn’t due until a month after that. Simple, inn’it?

It is very hard work running a small business. Keeping the books regularlyup to date is a chore many of us hate. However, it is much more fun to dothem while looking at a healthy bank balance, rather than juggling to keepwithin an overdraft limit. Prompt invoicing is the first step to good financialhealth, sleeping well, having a laugh.

It should be recognised that your customers, whom you would expect tohave well run accounts departments themselves, should be conservingtheir outgoing cash. That doesn’t mean they are being dishonest, or evenparticularly difficult. It is just sensible to pay promptly for prompt service,or goods that are fundamental to the viability of the business. Othersuppliers, who do not seem particularly bothered, or don’t get their acttogether, will inevitably be paid later. Once you have educated yourcustomers to place you in their priority stream, you tend to stay there.

Look at your own attitude to your suppliers. You have a decent business,collect your cash on the nail and could well manage to pay them all ontime. Yet it is amazing how many of them simply don’t bother to ask youfor their money properly.

Your own invoices must be clear and uncluttered so that they are notconfusing to the customer. They must contribute to your overall image ofefficiency and quality. Furthermore, it seems to me that to a degree theymight also be used as part of your overall marketing strategy.

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The conventional thinking has been that invoices are seen only by theaccounts department and therefore have no influence on the customer’sattitude, one way or the other. That has not actually been entirely true ofmy own businesses, so why should others’ be any different?

In the first place, I personally initial all invoices coming in to us, to clearthem for payment. In other words, Managing Directors do see invoices.

Secondly, our accounts manager sees it as part of his function to bring toour attention all manner of special offers, especially with regard to thesort of consumables that his department uses. This covers computerequipment, software, stationary, and so on, but also various other aspectsof the business that come into his orbit, such as training courses, cleaningproducts, tea and coffee for visitors: almost everything that is not orderedby someone for a specific project or that doesn’t relate to a technicalrequirement.

Invoicing therefore has a direct link with marketing and invoices do godirectly to the people who control the money! So I suggest you should notcompletely ignore the opportunity:(a) To reinforce the unified quality image of your business;(b) To include carefully targeted special offers.But beware! This is a fine line and easy to alienate those of us who hatejunk mail.

Monthly Statements

Send out a statement of each customer’s account at the end of eachmonth.

If you have the details all correct on your invoices, your software shouldrun this for you. Make sure statements follow the open item system,showing all unpaid items. And as with the order of printing your DebtorSchedule, have statements produced and sent out in order of accountbalance, so that the largest go first. That way, if you fail to send themall out on time for some reason, you keep on top of the greatest debts.

Statements help eliminate queries and identify miss-allocations: goodpractice between accounts departments. There may, for example, havebeen a perfectly legitimate query about goods relating to one invoice,which should not be paid. That does not eliminate the need to keep thecustomer up to date with the others.

Many companies in fact only pay off their invoices against a Statement,which gives them a double check that they haven’t paid twice. SoStatements are important. As ever, timeliness is important.

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Another cautionary tale: one of my major plc customers had a newM.D. He asked for all cheques presented to him for signature to be pinnedto the statement. This meant that his A/Cs department no longer had onewhen we rang. Two months of panic ensued before we rumbled that theyneeded 2 copies of each statement.

Debtor Schedule

Internally, the Debtor Schedule is the most important document becausethat demonstrates the efficiency of everything else. A debtor scheduleshould be run off every Monday morning.[A suggested example is in your pack.]

Note: the following six points are important:-

1. You can see at a glance each customer’s total debt against his creditlimit.

2. You can see immediately any proportion that is overdue.3. The terms for each customer must be entered. They may not be

your standard. The customer’s payment system (e.g. againststatements) should also be noted here. By having the phone numberand contact name, you can ring the customer yourself to find outthe problem, if there is one, without your having to interrupt youraccounts dept. It should be recognised that it is not always veryeasy for an accounts clerk, checking an irregularity, to talk with thenecessary authority to the senior management of a significantcustomer. Sometimes a boss to boss chat, having first checked withthe usual contact in their accounts department, produces not onlyimmediate short term, but better long term results. Then if what aDirector has promised is unfulfilled, you will be exceedingly wary ofproviding him any future credit.

4. Debtor schedule information also demonstrates that the accountsdepartment is doing its job properly — and has been given thenecessary tools.

5. You might find that on some software the “total” column can appearincorrect. This is when the allocation of cash doesn’t tally with all theinvoices. The totals at the bottom may also not add up quitecorrectly for the same reason. However, the error is of no greatsignificance and you soon learn to adjust for this, in round numbers.

6. The debtor schedule will give you the monthly and the total amountowing to you.

The amount owed to you should obviously go up and down depending onthe stage of the month. For example, if your terms are for payment by theend of the month following date of invoice, and everyone paid exactly atthe end, your schedule would follow the following pattern.

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Month one invoices, say, £5,000 per week: total debtors £20,000.Month two, end of week one: total debtors £25,000.

Week two: total debtors £30,000.Week three: total debtors £35,000.End of month: total debtors £40,000.

Monday morning, 1st day of month three: total debtors £20,000.

So, in a perfect world your maximum debtor book would be twice yourmonthly sales at a month end. Don’t panic towards the end of the month ifthe figure is high: it should be! This is also what we predicted, remember,when we were deciding on credit limits.

External Routines for the Accounts Department

Your routine monthly call in advance of due payment dates: yourinvoices will have arrived in your customer’s hands at various stages ofmonth one. Give them most of the first week of the following month toenter them all in their purchase ledger. You then phone the customer,mostly into week two.

Ring all your customers, until you are sure they have been trained to payyou on the nail as part of their routine.

Apart from any new customers, phone them, not in alphabetical order,but in descending order of value outstanding, the same way in whichthe weekly Debtor Schedule was printed and the order in whichStatements were sent out. You are then certain of keeping the largestamounts under the closest scrutiny.Your accounts department’s phone call to a customer will now befundamentally different from any call that would have been possible onthose wretched “30 day” terms.

On a routine monthly basis it might go as follows: “This is Mary fromMcQueen Rose Limited. I’m just ringing to check that you received ourdelivery {giving all the details} and that everything met yourrequirements? Our related invoice(s) are {Nos., dates, and amounts,total.} Are you able to confirm for me that they will be included in [yournext] cheque run [this month’s] cheque run, due for payment by the20th?”

For a new customer, of course, the call will be slightly modified along thelines of your welcome letter that accompanied the first invoice.

The reply will either be affirmative, or that there is some reason for ahold-up. Mary’s job is to find out the nature of the problem, if there isone, so that the right person can immediately sort it out with theappropriate contact in the customer’s firm.

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.Mary must routinely make a note of the date of the call and the nameof the person she spoke to. Also, if there has been a problem, the nameof the person in the customer company who should be contacted toresolve the matter.

It is vital that Mary then passes on this information to the appropriatedepartmental manager in her own company. I’ve had occasions in the pastwhen our Mary had done all the right things initially, but had failed to passon to our production department that the customer had a problem.

She must drop anything else she may have had to do and pass on thatinformation now!

It must be explained to her and the rest of your team that, apart fromgetting the money in on time, the greatest benefit of trading on “end ofmonth following” terms is that any problem can be resolved at least amonth earlier than would otherwise have been possible, but only withher help. Her job has in reality become quality controller.

A common ploy of many companies is to delay payment of all theiroutstanding invoices whenever there is a query on just one of them. Sopart of Mary’s technique also has to be to obtain confirmation that theremaining invoices will not be delayed for payment. It is equally obviousthat her task in this respect will be immeasurably helped if she hascomplete confidence in her own company’s speed of response to querieson an invoice.

An important part of the knowledge bank that your own Mary will besteadily building about each customer is the way in which that company isorganised: who signs the cheques, how many signatures are needed, thefrequency of their cheque runs and whether payment is made againstindividual invoices, or against Statements.

Tied in to the information from the sales department, this will create anextremely comprehensive insight to each customer. Record this as apermanent note on the debtor schedule.

Quite clearly, all this has to be steady process, rather than instantconversion. At first it will be highly unlikely that you will manage tocontact every customer in weeks one and two. Indeed, I originallydesigned our system of requesting payment by the 20th purely as a stepalong the same road towards ensuring payment by the end of the month,simply to give us ten days grace in which to ring late payers.

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Be especially vigilant and rigorous around Christmas, Easter and August orany other holiday period, especially those that fall towards the end of amonth. November invoices due for payment at the end of December arenotoriously difficult to collect. Mary should (a) ensure that she calls ahigher proportion of your customers than normal and (b) add a specificenquiry about their arrangements for the holiday interruption. It might beworth giving her some additional support, or be even more effective if shestarts the process a month earlier still: “When will be the last day for youto accept invoices to enable payment before Christmas?”

Duties and Routines for the Sales and Marketing Departments

The job of a sales and marketing team is not simply to sell, but tounderstand the market and how it works, having a valuable input todeveloping the company’s long term strategy. They are responsible forestablishing, maintaining and reinforcing the company’s positioning andimage in its chosen markets. That image is affected by everycommunication sent out by the company, from the Chairman’s lettersdown to invoices sent out by the accounts department.

Image and appropriate quality are elements of marketing. As Chairman orManaging Director I personally expect my expert marketeers to slap mywrist if I let them down by failing to keep to the standard we have agreed:un-corrected typing or grammatical errors in letters, for example. Theydo!

Credit control is very much part of the sales and marketing department’sresponsibility, beginning from the initial point of contact. It is theirresponsibility to do the appropriate customer vetting in the first place. Aspart of that process they have to identify the true decision-maker. Arisingfrom their intelligent questioning to identify customers’ needs, theyautomatically ascertain if he is doing well or might be struggling. They arethe ones who are likely to have been to the customer’s premises andgained extra information from that visit. They know what other productsand from where else he buys, not just in relation to your own immediatecompetitors. His relationship with his competitors reveal a lot as well: andwe are always looking for further leads and referrals.

Therefore it is the sales department who will be maintaining the ongoingrelationship with the customers and who will need all relevant informationabout them constantly to hand. Clearly, financial details, in respect ofcredit status reports, the current payments record and credit limits arevital components of that information. It is obvious and well establishedgood sense to direct ongoing sales efforts towards those companies andsectors with good prospects for growth and the cash resources to pay foryour products.

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It follows that the logical place to keep all customer informationmust be in the marketing department’s customer files, not in theaccounts department. Computer filing systems and links can be organisedto make this as simple as possible.

Individual customer files should contain:1. The signed application form for a credit account.2. One of the customer’s letterheads.3. The latest credit agency report (and maybe a single sheet from

previous reports to accentuate trends).4. Your signed and dated credit limit approval.

It is also vital that the sales department receives a regular weekly copy ofthe debtor schedule produced by the accounts department. In the case ofany customer where payments are falling out of line from those originallyagreed, one of the most fruitful ways forward is for sales to have a quietword with the buyer. In most companies a nudge from the buyer canovercome the natural reluctance of his accounts department to pay outearlier than they have to. It is always possible that the customer’spersonnel or systems have changed and the terms or mechanics will needadjusting. Once again, this has to be a job for sales, not accountants.

In the sort of company where, for one reason or another, the buyer hasno such clout with his bought ledger department, you may need to get thesignature of the MD or Finance Director to authorise their next purchase.If that sounds over the top, you are right, it is, but that relationship withina company is precisely one that is likely to give rise to deliberate delays inpayment. So you have to go right back to the beginning, evaluate theamount of hassle and increased risk and ask yourself again: “Do you wantthem as a customer and if so, on what terms?”

So you hand over customer information to your accounts department forthem to run the account only after your sales team, and you, haveestablished the agreed payment procedure and given the O.K.

Your accounts department will then have all the details it needs to monitorand control each customer’s account.

Their relationship with the customer will now become similarly friendly,professional and enjoyable, because all the details at your end will becorrect. The monthly check-up with a named junior bought ledger clerkwill become fun rather than the mind numbing hassle of trying to locatesomeone who will always have gone out to an early lunch, rather thananswer your call about late payment.

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Does all this sound onerous?“My sales people should be selling”.“This is a most essential part of selling.”We are back to that first rule: a sale is not a sale until it is paid for.

Recap: Core Message for Module Eight.Send out accurate invoices, as early as possible, backed by monthly

statements and weekly debtor schedules.Ring all customers before payment is due, starting with the highest

value.Use your one month lead for instant problem solving and outstanding

service.

Exercises for Module Eight1. Why should you never tell customers their credit limits?2. List three reasons for a credit limit.3. In your company, who sees incoming invoices?4. In what order should you list debtors and statements?5. In what order should your accounts department ring customers?6. At what time of year is it most difficult to obtain payment?7. What four items must each customer file in the sales department

contain?8. How might your own company’s USP be strengthened as a result of

this workshop?

Your Notes and Answers to Exercises.

1.

2.

3.

4.

5.

6.

7.1.2.3.4.

8.

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Documentation Pack

1. Account Facility Form.2. Customer Credit Limit Internal Control Form3. Weekly Debtor Schedule.4. Sample Order Form.5. Sample Invoice6. Trade Reference Enquiry Form.7. Balance Sheet8. Welcome Letter to Customer Accounts Department

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Customer Account Facility Form

Company Name: _______________

Company Address: __________

Post Code: ______

Website: _________________________E-mail____________________

Telephone: Fax: ______ __________

Registered Office Address: __________

Company Registration: VAT No: _____

Please give details of invoice address and any special instructions, ifdifferent from above: ____________________________________________________________________________________________________________________________________________________________________________________________________

Name of Accounts Dept. Manager: _____

E-mail address: ____________________________________________

I have been given a copy of your Standard Terms of Trade.

The details on this application are correct to the best of my knowledge andbelief and I/We agree to abide byyour terms of settlement which are: PAYMENT TO BE RECEIVED BY

{ 20TH OF THE MONTH FOLLOWING MONTH OF INVOICE }.

Signature: Date: _____

Name (BLOCK CAPITALS): _____

Position (Director): _____

A copy of our letter heading is attached.

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Credit Limit: Internal Control

Customer Credit Limits

Customer Name…………………………………………………………………………………….

Account Number…………………………………………………………………………………..

Credit Limit Set…………………………………………………………………………………….

Date………………………………Signed……………………………………………………………

Changes

Date……………New Limit…………….. Reason…………………………………………..

Signed………………………………………………………………………………………………….

Date…………..New Limit…………….. Reason…………………………………………..

Signed…………………………………………………………………………………………………

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Weekly Debtor Schedule Monday 31 August 2005

Phone Number:0208 1234

Credit Limit£5,000

Fax No 0208 1234

Contact:Sally in accounts.George in sales.

Terms:20th MonthagainstStatements

M.D. Charles Brown. Direct line0208 181234

Invoice No Date Total Current 1 month 2 months 3 months+ Comments

43394 07.08.01 52.50 52.50

43395 07.08.01 52.50 52.50

43418 08.08.01 52.50 52.50

43423 12.08.01 52.50 52.50

43438 12.08.01 52.50 52.50

43468 14.08.01 52.50 52.50

43469 14.08.01 52.50 52.50

43482 26.08.01 52.50 52.50

43511 28.08.01 52.50 52.50

43527 28.08.01 9.99 9.99

TOTAL 482.49 482.49 0.00 0.00 0.00

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Sample Acknowledgement of Order Form

Name of Purchaser

Position

Company

Address………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

Website ………………………………………….

Tel No ……………………………………………….

Fax No ……………………………………………..

E-mail ………………………………………………

Purchase Reference No Order No.

code description list/partnumber

quantity priceper unit

£

Packaging/Postage/Delivery

Sub-total

VAT

TOTAL

IF NEW CUSTOMER, HAVE OUR STANDARD TERMS BEEN PROVIDED?YES / NO Date: .......................

Invoicing Instructions

Delivery Date and Time

Agreed Payment Terms Credit Check Date

Delivery Address Contact Name

Tel No

Fax No E-mail

APPROVED BY DATE

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Sample Invoice

[Notes]

Your companyname andaddress

XYZ & CO LTD InvoicePage 1 of 1

Don’t forgetyour postcode

Postcode

Direct line? Tel No

Accounts e-mail?

Fax NoE-mail

Your VAT VAT Registration No

Customer’sAccounts Dept

YourInvoice No.

Address Invoice/TaxDate

Account No

Marked for theattention of:

What did yousupply?

For example:

Service Detailsor Product Details,e.g. Delivery Note

Numbers,Job Number,Product Code,

description, quantity,dates.

VAT

The same asagreed with the

order

PAYMENT TERMS

Note of DeliveryAddress if different

Carriage

Total Net

Total VAT

TOTAL

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Trade Reference Enquiry

Suggested letter wording:-

Dear [Name],

We wish to supply XYZ Associates with [goods/services] on credit termsand your name has been suggested as possibly being able to provide uswith some guidance.

Anything you are able to tell us will be treated in the strictest confidenceand will be used only in connection with this customer’s enquiry. It will notbe divulged to any third party.

I enclose our standard Trade Reference Enquiry Form with a stamped,addressed envelope for your reply.

Thank you very much for your assistance.

Yours sincerely,

Managing Director.

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Trade Reference Enquiry Form

Name and Address of Business [the one you are asking about]:_____________________________________________________________________________________________________________________________________________

_______________________________________________

How long known to you?

years less than one year?

On what terms do you currently sell to them? (Please circle)

30 days 60 days longer?

Your average monthly sales (Please circle)

< £1000 £1000-£5000 over £5000

(Please circle) Are payments:

Prompt? 30 days late? Later?

Name of your payments contact:

Any other useful information you could add?

Thank you very much for your help.

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Balance Sheet

Fixed AssetsBuildingsInvestmentsResearch & Investment

Current AssetsStock & work in progressDebtorsCash

Current LiabilitiesCreditorsBank overdraftAmounts falling due within one year

Net Current AssetsCurrent assets less current liabilities

Total Assets less Current Liabilities

Capital and ReservesCalled up share capitalBank loanP. and L. account

Net Worth or Shareholders’ Funds

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Suggested Letter of Welcometo a New Customer’s Accounts Department

Dear Mr. / Ms…….(by Name),

Please find attached our Invoice to you in respect of your company’s firstorder for ………..

We very much hope this will be the beginning of a long and mutuallyvaluable association, so we wish to ensure from the outset that theworking relationship between our two accounts departments is as smoothas possible.

Will you please check this first invoice carefully to see that it includes allthe details you need for your routine processing.

Also, as you know, many firms in our industry are experiencing valuablecost savings for both buyer and seller by moving towards accepting e-mailed invoices and making electronic payments direct to their suppliers’bank accounts. Indeed the Institute of Directors recently went so far as topublish advice showing the benefits of self billing.

May I phone you in a day or so’s time to double check that we are inaccord with your preferred method of working?

With warm regards,

Yours sincerely,

John Smith, Accounts Manager.

Note:-When John Smith phones the customer he should check on theinformation given to the salesman.

Do they pay against individual invoices or against statements?How many cheque-runs do they have per month?When is the latest that cheques have to be received for inclusion in a run?Would split payments help their cash flow?What about e-mailed invoices and credit transfers?

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Vision and Mission of Colin Thompson:

Vision

Changing Limited People into Limitless People and Turning Limited Companies into Limitless Companies.

Mission

Success is a journey, not a destination… Our mission is to make you successful in life.

email:[email protected]

www.cavendish-mr.org

“The biggest discovery of every generation is that humans can change their life

by changing their mental attitude!”

Albert Schweitzer

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USEFUL INFORMATION

Publications to help you become more successful:

Business models on CD/Software

The Enterprise Business Model

Interpreting Accounts for the Non-Financial Manager

The Valuer- Business Valuation Software

Managing For Customer Care

Be paid on time MasterClass System

It’s a Digital Future

A Flow Chart of the Partnership Process

How to Become a Successful Franchisee

Plus many more publications, research reports, guides, business andeducational CD`s and pdf`s.

All the above business tools are available by visiting the website:www.cavendish-mr.org

"You cannot be a success in any business without believing that it is thegreatest business in the world... You have to put your heart in the

business and the business in your heart."

Thomas J. Watson Sr - American industrialist who built the InternationalBusiness Machines Corporation (IBM)