Credit Control Procedures
If you provide credit to your customers, you must complete credit control regularly to keep cash in the business. Most people either do not have enough time or find it difficult to ask for money. We have produced a short guide to help you contact the customer requesting payment.
Implementing procedures to chase customers for payment at the correct time is essential. Chasing too early can annoy a supplier, or leaving it too late can cause cash flow issues.
Credit control is also known as accounts receivable collection.
Accounts Receivable Collection- tips to get started
The best time to sort out credit management is before you make your first sale. Talk to your clients and agree on credit terms with them.
Ask for the contact name, telephone number, and email address of the correct person in their organisation to whom invoices should be sent.
Please check that you have the correct postal and email addresses for sending invoices (this may not be the same as a delivery address).
Find out the process for getting invoices paid – i.e. Do the invoices have to be authorised by a manager? Do they need a purchase order number? Find out how often and when payment runs are carried out.
If you have this information right at the start, it will make life a lot easier when you’re doing your credit control.
Credit Control Accounting Software
You might think that accounting software is there for invoicing and reports. It can do so much more if set up correctly, including:
- Sending invoices to clients while out on the road.
- Payment gateways can be added to invoices so they may get paid more quickly.
- Issuing customer statements.
- Sending automatic reminder letters.
- Keeping track of outstanding debts.
Good accounting software can save time in credit control. We recommend the following software: QuickBooks and Xero
9 Credit Control Procedures
1 Complete Credit Checks
Before giving credit, it is worth carrying out a check on them. Some businesses offer credit checks for a small fee; you can also obtain information on any limited company from Companies House. One good way to see if a company is a good payer is to request references from other companies.
2 Issue Terms and Conditions of Sale
Your customer should receive a printed copy of your terms and conditions of sale, which will include the credit terms that you have agreed to. This can be provided with your invoice or as a separate document. Many businesses include a copy of their standard terms and conditions of sale on their website.
3 Credit Control – Invoices
Always state clearly on sales invoices the agreed payment terms. If your customer has quoted a purchase order number, ensure it is included, or it might be returned unpaid.
Before sending any invoices, ensure they are correct. If an invoice has an incorrect amount or details, the customer may reject it. Check the address it is sent to; it may be a postal or email address.
4 Accounts Receivable Statements
Send out statements of accounts to everyone who owes you money every month. It will list all the outstanding invoices for payment and the total balance due. Some companies ensure that statements are checked for any discrepancies.
If you run accounting software, you will generally have a facility to email and print them. If you do your bookkeeping manually, you can download some free Microsoft Excel templates.
5 Credit control – Contact your Customer by Phone
Contact the customer by phone a few days before the invoice is due for payment.
If you haven’t spoken to the accounts department before, introduce yourself and get a contact name so you know whom to talk to in the future.
When you call regarding credit control, confirm the following:
Has the invoice been received?
Does the invoice need to be authorised by management, if so has it been done?
Is there a problem with the invoice? If so, what is the query and what needs to be done to resolve the issue?
When are payment runs completed? (They may be daily, weekly, or monthly.) Knowing the details of payment runs will help you time when you send your statements and when you make follow-up calls.
If you have problems getting through to the correct person or they have not stated when the invoice will be paid, try to speak to someone above them or contact the person to whom you sold the goods or services.
Do not phone too often – they may start refusing your phone calls – and always be polite.
6 Credit Control – Letters
If you receive no response from a statement or phone calls, try sending a letter. The letter will need to state clearly the amount outstanding. It is worth attaching a statement or copy of the invoice; this may save time if they cannot find the paperwork.
For an initial letter, keep it formal but polite. The following is the wording you might want to use:
We refer to our Invoice No.[number] dated April 18, 2024 and our various telephone conversations regarding your payment.
As yet no payment has yet been received. Could you please advise when payment will be made?
If there is a problem with the invoice, please get in touch with us to discuss it.
If payment has been made in the last 3 days, please ignore this letter.
Some companies will only pay once they have received a ‘letter of claim’ or a ‘seven-day letter’. It will state that if the outstanding amount is not paid within a certain period (usually seven days), you will intend to sue without further notice and that any costs and interest will be passed on.
You can send this letter yourself; you do not need a solicitor to do it for you.
We have included a debt collection letter, which you can download and amend for your seven-day letter.
7 Debt Collection Letter
If you remain unpaid despite issuing statements and letters, sending a debt collection letter may be an excellent next step.
If you find yourself pressed for time and unable to manage credit control effectively, it might be beneficial to explore other options. One such option is to engage the services of a specialised agency dedicated to managing credit control on your behalf.
Alternatively, you could consider hiring a dedicated credit controller to join your team. This individual would focus solely on overseeing your credit management processes, ensuring your financial operations run smoothly and efficiently. Both options provide a viable solution to maintaining healthy financial practices without overstretching your resources.
8 Factoring
Factoring will release funds immediately; you do not need to wait for payment from the customer.
A factoring company will pay you a percentage of your invoice; this can be as much as 95%. They will then collect the money from the customer and pay you the balance less than any fees agreed upon by the factoring company.
Factoring relieves the stress of cash flow and allows for time for credit control. However, the disadvantages are that you do not get all your money, and you lose control of the supplier-customer link, which can cause friction in your relationships with your customers.
9 Credit Control – Court Action
If you have gone through your procedures of trying to collect the payment from your customer and sent a letter of claim and they have still not settled their account, further action may be needed.
Taking a customer to court should be a last resort. If you do, you will likely lose their business.
Try calling your customers and asking if there is any reason for them not paying their bills. Keep your tone friendly and welcoming, and propose some options, such as accepting post-dated cheques for payment over a few months.
If that approach fails, you have several options for proceeding. You can pass the details to a debt collection company or find a solicitor to do it for you, or you can do it yourself by claiming the county court.
There is much information on how to do this on Her Majesties Court Service website. The site explains how to claim, procedures and costs. You may also be able to make a claim online using Money Claim Online.
Return from Credit Control to the Bookkeeping Basics page.
