While it is an essential part of running a business, collecting payments from customers on time is frequently one of the most difficult difficulties that entrepreneurs and their financial teams encounter. In this tutorial, we’ll go through exactly what a solid credit control process and procedures look like, along with plenty of recommendations and larger considerations. We’ll also discuss how credit control software will enhance the process of collection.
What Is Credit Control?
Credit control, often known as credit policy, refers to the techniques used by organisations to increase sales of their products or services by extending credit to potential customers or clients. At the most basic level, businesses want to provide credit to people with “excellent” credit and limit credit to those with “poor” credit or a history of delinquency. Depending on the situation, it may also be referred to as credit management.
Why is Credit Control Important?
Your company’s cash flow may suffer if it does not have a strong credit management system. If you get it right, you’ll have a smooth process where clients pay their invoices on time, and you’ll have more confidence in your cash flow. Understanding your finances is vital not only for keeping your business running but also for identifying new opportunities and places for growth.
Failure to employ credit control procedures could jeopardise your company’s financial health, lowering your credit score and restricting access to crucial finance or client opportunities. Learn more about why business credit is important and how to improve your own business credit score by reading our guide.
When weak methods result in cash flow problems, it can be difficult to pay suppliers, overheads, and, in some cases, employee wages. Extending substantial credit limits to consumers who fail to fulfil payment deadlines frequently can put a business in considerable jeopardy, even terminating in liquidation.
What is the Distinction Between Credit Management and Credit Control?
Credit control is the first step in ensuring that you are doing business with clients that accept your terms and can pay you on time. The next phase is credit management, which aims to avoid late or nonpayment via monitoring, reporting, and record-keeping. The better your credit control, the easier your credit management process will be.
Creating Credit Control Procedures
To build solid, repeatable, and working credit control processes, your organisation should have a formal, documented credit control procedure or policy—that is, an established or official way of doing anything. Putting these credit control procedures in writing can help to build a disciplined culture inside your organisation and guarantee that everyone is following the same rules.
These procedures should include specific guidelines for your credit control conditions, consumer verification and outreach, invoicing process, and late payment process. Your credit control procedures and credit management rely on the involvement and understanding of your entire organisation, so consider distributing it widely and training your sales force, for example, rather than simply the finance department.
Making your Credit Control System Work
Set up a variety of payment methods in your credit control system to make it as easy for your consumers to pay you as feasible. Even small firms may now take online payments without having to set up and maintain merchant banking accounts, which can be costly. Increasing the number of payment options available to your consumers will help to streamline your control system and increase on-time payments.
As previously said, ensure that your credit management team routinely examines the creditworthiness of all customers, not just new ones. In-sensitive economic times or industries, quarterly assessments of client profit and loss statements, balance sheets, cash flow, and future billings will provide you with a real-time assessment of their ongoing creditworthiness and warn you of possible problems before they become crises.
Credit Control Process Basic Steps
Credit control procedures assist you in ensuring that your company’s payment conditions and regulations are followed. This entails communicating those conditions and actions to both your customers and your team: Describe how you’ll issue invoices and what you’ll do if they’re late. Make sure you include the following steps:
#1. Ensure you have the correct client information:
The correct and legal name of your customers, including the company’s entity, the correct address, and, later, the name of the person to whom the invoice should be sent. Mistakes in something as simple as this can lead to invoices going missing, payments being late, and your credit control process getting off track from the start.
#2. Make sure that new clients are subjected to routine due diligence and credit checks
This includes evaluating their finances, reputation, company, payment history, and so on. Online services such as Experian.com and Duedil.com can provide important company credit checks.
#3. Establish credit limits as part of your credit control process to manage your risk exposure.
Ask yourself what the maximum outstanding amount is for each of your customers, and consider if they consistently pay on time, if your business is cyclical, and if your sales are consistent throughout the year. If you need assistance, keep in mind that some suppliers, such as trade credit insurers, can assist you in vetting clients.
#4. Maintain regular credit control reviews to keep track of pending and past-due invoices.
Determine which consumers require follow-up. Investigate why an invoice hasn’t been paid: has the customer overlooked it? Have you misplaced it? Is there an invoice dispute that needs to be resolved?
Part of your credit control process should include determining when to refer these issues to your credit management team so that they can speak with the customer and consider various ways to recover payments, such as offering different payment methods, offering early-payment incentives, or changing the credit terms. You have numerous alternatives.
When and How to Send a Credit Control Letter
Customers do not always follow their responsibilities, despite your best attempts at credit control, and it is up to you and your team to find a solution. Credit control letters can assist you in collecting late payments, especially if you follow the following guidelines:
- One week after the due date has gone, send a first credit control letter as a polite reminder, demanding payment within the week.
- If the debt is still outstanding one week after the first letter, use harsher language, seek payment by a certain date, and enclose the invoice.
- If the debt is still outstanding two weeks after delivering the second letter (i.e., one month after the original due date), consider obtaining outside assistance – such as a debt collection agency or going to your trade credit insurer – to get payment. Communicate your objectives to the customer via email and postal correspondence, and be prepared to follow through on your intentions.
The letter should not include frivolous threats. It is part of your company’s overall credit control process, and it is intended to ensure that customers complete their payment obligations in accordance with the terms you have both agreed upon.
Simple Credit Control Tips
In addition to credit screening new clients, there are several other steps you may take to improve your credit control systems and preserve your cash flow.
#1. Check your sales ledger on a regular basis.
Your sales ledger should always be kept up-to-date with as much detail on each of your sales as possible, including any credits provided. Make a habit of regularly examining the ledger to discover any upcoming or missing payment dates. You will avoid enormous and unmanageable debts if you identify problems early on.
#2. Customer relationships should be prioritised.
Your company is built on solid customer relationships, but it also plays a role in an efficient credit control process. In addition to checking the credit of new customers, it is critical to conduct regular checks on current ones because you never know when they may have run into financial issues. Maintaining open lines of communication should encourage them to be candid and, if necessary, to request flexibility. If you have a good working relationship, to begin with, they will understand why you may need to change the payment conditions or want upfront money.
#3. Rethink your invoice design.
If you’re always chasing down late payments from consumers, it’s time to rethink your invoicing procedures. Make it as plain and straightforward to understand as possible. Are your clients failing to pay on time simply because they misunderstood when it was due?
Keep key information like your acceptable payment methods, credit conditions, and payment deadlines prominently shown on your invoice, and don’t be afraid to re-iterate this in your client correspondence as well. A number of specialised software providers, like Quickbooks, can automate this process, allowing you to consistently deliver professional bills.
It’s also a good idea to find out what works best for your clients. Some larger organisations may have severe requirements requiring invoices to be received by specified dates in order to satisfy the payment schedule. Establish as much of this information as possible early in the relationship to encourage future on-time payments.
#4. Keep an eye on your credit score.
If you’ve invested in a system like Experian Business Express, you’re probably doing credit checks on prospective clients or suppliers before working with them. Remember to include regular check-ups on your existing customers as well, as their circumstances may alter unexpectedly.
#5. Prioritize larger debts.
When your company is saddled with several outstanding debts, it can be overwhelming. If you find yourself in this predicament frequently, it’s important to reassess your credit control procedures. Meanwhile, concentrate your efforts on addressing the largest debts that have the greatest impact on your cash flow. This will help to protect your company from amassing excessive debts.
#6. Take the necessary steps.
If your efforts to collect outstanding payments from consumers are futile and the debt is piling up, it’s time to take action. The government website details the methods and options for debt collection. These include mediation, filing a court claim, or issuing a statutory demand; the proper method is determined by the amount owing.
If you have no other choice but to initiate legal action, you must first properly notify the consumer of your intention. This is accomplished through the use of a Letter Before Action, which states your intention to file legal action if the debt is not resolved by a certain date. Take the time to understand the complete requirements and repercussions of this process before proceeding, or contact an experienced legal practitioner to assist you.
When to Consider Outsourced Credit Control
For some businesses, outsourced credit control may be the most protective and least expensive alternative. It can free up your time and resources so that you can pursue opportunities, enter new markets, and make competitive offers to prospects while protecting your cash flow.
Trade credit insurance, for example, is a complete solution for outsourced credit control. It protects your receivables due within 12 months against unanticipated commercial and political risks (customer bankruptcy, changes in import and export restrictions, and so on), ensuring your cash flow and avoiding bad debt. It entails consumer vetting, financial information on your customers and prospects, debt collection, and compensation in the event of nonpayment.
Another advantage of outsourcing credit control is the ability to communicate with global late-paying customers when local languages, time variations, cultures, and customs are present. Indeed, outsourcing credit control to a global risk insurer ensures that your international credit control is handled by local people who understand and share your client’s language and cultural background. This can considerably eliminate misconceptions and improve the efficiency of the credit-control process.
Credit Control Software
Your cloud credit control software serves as a central point of contact for all of your credit control records. It collects all chasing emails issued in regard to various bills. It also keeps a record of any responses that have been sent between you and your customer in response to those chasing emails. Cloud credit control software also allows you to keep track of any additional interactions you have with the consumer, such as phone calls.
Your finance team, as well as any other team members who require it, will have access to the entire credit control interaction with the customer via your cloud credit control software. There is no longer any doubt about what has occurred. And there’s no need to sift through inboxes or forwarded items to piece the puzzle back together.
In addition to this historical perspective, your cloud credit control software will offer you data that will make your control smarter and more successful. It will show you client payment histories and trends so you can see objectively who your good and problem payers are. Then you may customise your chasing and credit extension accordingly, increasing the likelihood that your invoice will be paid on time.
Who makes use of credit control software?
Cloud credit control software is designed for organisations that want to get their invoices paid on time and in the most efficient and friendliest manner possible. They wish to increase the efficiency of their finance teams’ time by automating the email-chasing portion of their credit control process. While maintaining the kind, human touch that makes that chase effective. All for the sake of achieving the highest possible number of days sales outstanding and cash collection performance.
Conclusion
Credit control is not an easy task; it necessitates organisation, perseverance, professionalism, and comprehension. However, by putting procedures in place and following them step by step, you may reduce risk and financial losses, enhance cash flow, and thus the success and smooth operation of the firm.
Good credit management necessitates organisation, preparation, and tenacious adherence to processes. While discussing your client’s ability to pay can be a sensitive subject, credit control is a common process that should comfort them that your organisation is trustworthy and performs due diligence.
Credit Control FAQs
What is credit control in banking?
Credit control is the lending method used by banks and financial institutions to provide money to customers. The strategy focuses on lending money to consumers who have a good credit score or credit record.
What are the main objectives of credit control?
Maintain an acceptable level of liquidity sufficient to achieve high economic growth rates while maximising resource use while avoiding high inflationary pressures. Maintain the country’s exchange rate and money market stability.
What is the role of a credit controller?
A Credit Controller, also known as a Debt Collector Agent, guarantees that businesses and consumers that owe them money are paid. Their responsibilities include performing credit checks, establishing payment schedules, and keeping proper financial records.
