Implementing Effective Credit Control Procedures in Your Business.
- Do you take credit control seriously in your business?
- Do you use effective credit control techniques to minimize business risk?
- Do you take a systematic and structured approach to assessing customers before deciding to grant or renew a credit limit for each of your customers?
- Do you actively monitor your customers in relation to their payment performance?
- Do you closely watch their performance in the market place and with other suppliers to give you an early warning of trouble coming down the tracks?
- Do you take decisive action in relation to cutting off credit lines when you need to?
Your answers to all of these questions will determine if your business is being put at risk or not. It’s all about how you run your credit control function. If you don’t offer credit to customers – great – then this article is not for you. Otherwise, read on and learn how the best companies implement effective credit control procedures and standards.
Credit Control is a part of a business that often does not get the level of attention it deserves. Perhaps it lives somewher within your accounting function and the propeller heads take care of it. However, credit control is in fact the engine room of your operation, which generates the cash that pays for everything your business does. Without cash to pay your suppliers, your employees, and your overhead, your business will quickly wither and die. Profitable sales only become profitable when you are paid for them in a timely manner. Therefore, it is critical that your credit control function is run in an efficient and effective way. It is often a fine line to walk when you are trying to maximize sales revenue while minimizing credit risk associated with your sales.
There are about half a dozen key functions carried out by a Credit Controller or a Credit Control Department and these are as follows:
- Firstly, the Credit Controller must obtain verifiable trade and/or credit checks when opening a new account for which you intend to put a credit limit in place.
- Secondly, The Credit Control Department needs to carry out its own assessment of the reputation and credit worthiness of the customer. This may involve seeking a copy of the customer’s financial statements as well as making discrete enquiries with other industry participants.
- Thirdly, it must agree firm payment terms with each individual customer in conjunction with the sales representative or relationship manager and these should be set out in writing and signed by your business and also by the customer. Where goods are being made available on credit, you should also include a “retention of title” clause in your sales documentation.
- Fourthly, once credit has been offered, it is imperative that regular reviews are carried out to ensure that each customer stays within agreed terms. Periodic reviews of customer credit worthiness are also an essential component of credit control, as circumstances and financial stability of your customers may change over time. This should include updating credit checks from time to time.
- A fifth element of credit control involves making timely decisions in relation to cutting off credit if and when payments start to fall behind.
- The sixth element involves having proper processes and procedures in place, which kick in automatically when it becomes necessary to address newly delinquent customers that pose a potential danger of becoming a bad debt. Bad debts are next to impossible to avoid on an occasional basis, but good management of your credit control function can keep them to an absolute minimum.
So which of the following checklist items does your business consider when making a decision to offer credit to a customer or a potential new customer?
- Character of the business owner
- Capacity of the business to repay from its ongoing income
- Capital value of the business
- Conditions in the market beyond the business
- Solvency of the business
- Profitability of the business
- Efficiency of the business as determined by your analysis of the financial and operational efficacy of the business
Following each of the steps in this list is a really good practice, which can mitigate much of the risk associated with offering credit to customers. You should also back this up by getting trade and credit references before credit is offered as well as periodically thereafter.
A large part of a credit controller’s time will usually involve phoning customers to ensure that payments are made on a timely basis. Another of the day-to-day tasks of any credit controller is monitoring the number of days it takes for customers to pay from date of invoice. Virtually all accounting packages will allow you to run a report showing the number of days that each invoice for each customer has been outstanding. The standard break points are: current month, 30 days, 31-60 days, 61-90 days and 90 days plus.
The vast majority of your accounts should be in a single group, eg.30 days, which should be in accordance with your standard credit terms. Slippages beyond standard terms need to be quickly pursued and it should be rare for any invoice to fall into the 90 day plus category. Ideally, the trend in accounts receivable days over the last 1 to 2 years should remain steady for each customer. If so, this is a positive indication that your credit control procedures are working as they should be, particularly if there is no deterioration in the credit worthiness of your customers.
You must ensure that you have a well defined credit control system which provides for escalation when accounts become a problem. Ideally, you should also have the same person (or people) deal with credit control on an ongoing basis. In some smaller firms, credit control may be just a part of someone’s job and this is fine. The key to effective credit control is unbroken continuity and the development of relationships between your accounts receivable staff with the accounts payable staff in each of your customers. You need to record every touch with your customer so that there is no ambiguity about promises made and timelines agreed for receiving payment.
The measure of any credit controller or credit control department is the speed with which they deal with accounts that fall into arrears or give the slightest hint of becoming delinquent. This should involve open and frequent dialogue between the credit controller and the sales representative or relationship manager for each account.
You really must have standard procedures in place which automatically cut off credit and/or prevent the customer placing new orders when an arrears situation presents itself. You must also enforce maximum credit limits as well as a maximum number of days within which your individual customers must pay. Bad debts should run at negligible levels when you tightly monitor and control customer credit by effectively managing your credit control function as suggested in this article.
Hopefully you are following through on most of the best practices that are inherent in a well-run credit control function as discussed here. Nevertheless, you cannot become casual about credit control best practices, particularly since the difficult times most businesses have experienced since the worldwide recession hit in 2008. Obtaining Bank credit remains a challenge for smaller businesses and therefore, the only cash reserves you may have to keep your business functioning, will likely come from collecting your receivables in a timely manner. Vigilance is essential. Keeping your credit controller focused and attuned to anomalies is imperative. It is much easier to deal with customers in the early stage of problems rather than waiting until the situation becomes critical.
Sometimes, payment plans may be necessary to rectify out-of-order situations and credit limits may need to be reviewed and reduced in line with your experience with individual customers. Regular credit checks on customers showing increases in their receivable days will alert you to possible problems that have not manifested yet.
If all of these steps seem to be too difficult to embrace within the confines of your existing employees and your processes and procedures, it can be very cost effective to outsource credit control to a professional firm to run this important function on your behalf. The saving of just one bad debt per year may well cover the cost.