Credit is when you provide a customer with a service or product before payment. Credit control is the process of ensuring that the amount owed is collected on time, in line with the previously set agreement. This can alternatively be called credit management. If a customer does not pay within the time frame agreed, this amount becomes debt which will need to be chased. We refer to this as debt collection.
What are the major objectives of credit control?
The main objective of credit management is to avoid running up debt. Without income, you will not be able to take care of your overheads. To master credit control, you will need to understand the risks of allowing credit and have a clear plan on addressing them.
Secondly, you should aim to keep your cash flow positive. With good cash flow, you will be able to invest in your business; settle debts and return money to any shareholders you may have. It is vital to business success.
What are the usual steps in credit management?
Before a sale is made, it is important to learn more about the person you are dealing with. By gaining some background information on your potential customer, you can decide whether they are trustworthy enough to be offered credit. You can get this information by asking them to complete an application form or by performing a credit check on them. A credit check will allow you to read their credit report- a document that details their history with previous lenders.
- If you deem the customer to be credible, you can then move onto drawing up an agreement. Firstly, you will need to outline the payment date. This could be anything from being due on receipt to 60 days, the decision falls to you. The payment date should be chosen wisely, factoring in both your current cash flow and the customer’s credit history. Once you have confirmed the customer’s contact details, you should make sure they receive your email/letter without any problems.
- Once the agreement has been signed, you can proceed with the transaction. At this point, an invoice can be sent to the customer reiterating the terms of the sale and your credit policies. It is wise to send this out promptly to avoid any confusion over payment terms and to allow for postal delays. If you are sending the invoice out as an email attachment, it is worth setting a read receipt to check that it has been delivered successfully.
- For a thorough approach, it is recommended that you send a reminder closer to the date, especially if the payment date is quite far off. Most arrears can be avoided with a comprehensive process, so this extra correspondence is worth investing time into.
- Once the payment date has passed, if you have still not received payment you can then begin to chase. Via email, text or a phone call, you will need to investigate why the payment has not been made. In the early stages of arrears, you should keep your tone light and friendly to maintain a good rapport. The customer may have a perfectly valid reason behind the missed payment, in which case you can give them a little extra time. When it comes to newer customers with a questionable credit history, you may choose to escalate the case instead.
- If more time passes, you should then escalate the tone of your communications. Remind them of the agreement details and explain your arrears policy. Aim to be assertive, not aggressive, as intimidating a customer is more likely to lead to a dispute.
- Lastly, if arrears have become excessive, you can pass them onto a collection agency or seek legal action. It is always advised that you log every conversation between a customer as this can provide evidence to back legal claims.
How do you write a credit control policy?
Writing up a clear credit control policy for staff to follow is crucial to business continuity. It will make sure that the processes undertaken by your team are consistent and remain legally compliant.
You will need to cover these details within the policy:
Roles and responsibilities
State who should be responsible for each of your processes. Identify points where authorisation will be needed and who will be the key decision-makers.
Communication and procedures
Outline what steps staff should take at each step of the credit-control lifecycle. Specify what documents and communication methods should be used at each stage. Anticipate what problems customers may have and advise on how to resolve them.
Terms and conditions
Outline what payment timeframes should be used and how to escalate delinquent cases. List your penalty charges (if applicable) and rules about credit limits.
Further expand on the collections process, including how to pass cases onto third-party collection agencies.
Explain how you will re-evaluate existing processes to ensure that they remain continually relevant.
How can I improve my credit control?
The easiest way to improve your credit control effectiveness is to invoice your customers quicker. If you can, switch to emailing customers as sending invoices in the post can take more time. It may also help to send invoices as soon as a sale is made if you are not doing so already.
Improving the accuracy of the information you send will also make your credit procedures more effective. Beyond encouraging staff to double-check invoices, you can minimise errors by rearranging your files into a tidier layout. By keeping your documents well organised, staff are less likely to lose or misinterpret pieces of information. If details are lost frequently, a good secondary measure is to create backups so you can recover them swiftly.