Credit Control Procedures

In the fast-paced business world, where selling on credit is common, keeping a healthy cash flow and avoiding unpaid invoices is crucial. That’s where credit control steps in. Consider it your financial safety net, ensuring you get paid on time and protecting your profits. It’s about finding that spot between building strong customer relationships and looking after your company’s money.

Implementing credit control procedures to chase customers for payment at the correct time is essential. Chasing too early can annoy a customer, or leaving it too late can cause cash flow issues.

Credit control is also known as accounts receivable collection.

What is Credit Control

Credit control is managing a company’s credit sales to ensure timely customer payment. It involves a series of procedures to minimise the risk of bad debts and maintain a healthy cash flow. Credit control or credit management ensures your business gets paid for the goods or services it sells on credit.

Here are the main goals of credit control:

• Maintain a healthy cash flow
• Reduce bad debts
• Improve customer relations
• Improve profitability

Accounts Receivable Collection – Tips to Get Started

Proactive Credit Management: Setting the Stage for Success

Effective credit management begins before you make your first sale. Proactively establishing clear terms and understanding your customers’ payment processes can save you countless headaches.

Key steps to take:

• Open Communication: Discuss payment expectations upfront with your clients. Agree on clear payment terms, including due dates, late fees, and acceptable payment methods.
• Credit Checks: Assess the creditworthiness of new clients. This helps mitigate the risk of bad debts.
• Accurate Contact Information: Obtain the person responsible for invoice processing’s name, phone number, and email address.
• Invoice Details: Confirm the correct billing and email addresses for invoices (these might differ from delivery addresses).
• Payment Procedures: Understand your client’s internal invoicing process:
  • Are manager approvals required?
  • Is a purchase order number necessary?
  • How frequently are payments processed?

Gathering this crucial information from the outset will streamline your credit control efforts and ensure smoother customer transactions.

Credit Control Accounting Software

Accounting software is crucial in improving your credit control process by streamlining and automating key processes, leading to better management of outstanding invoices and customer payments. Here’s how:

• Accurate Invoicing and Tracking: Generate professional invoices quickly and easily, ensuring accuracy and clarity. Track invoice status in real-time, identifying unpaid or overdue invoices promptly.
• Payment Reminders: Set up automated payment reminders to nudge customers about upcoming or overdue payments, reducing the need for manual follow-ups.
• Ageing Reports: Generate ageing reports to identify customers with outstanding balances, prioritise collection efforts, and proactively address potential bad debts.
• Customer Credit Management: Maintain detailed customer records, including payment history and credit limits, to make informed decisions about extending credit and setting appropriate payment terms.
• Integration with Collections: Some accounting software solutions integrate with collection agencies or legal services, streamlining the process if further action is required for persistent late payers.

Accounting software empowers businesses to maintain better control over their credit control processes, improve cash flow, and reduce the risk of bad debts by automating these essential tasks and providing real-time financial insights.

Good accounting software can save time in credit control. We recommend the following software: QuickBooks and Xero.

9 Effective Credit Control Procedures

1 Complete Credit Checks & Risk Assessment

Before giving credit, it is worth carrying out a credit 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, including the credit terms 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. Setting Credit Limits

Establish appropriate credit limits for each customer based on their credit history, financial stability, and business relationship. A credit limit will help reduce the credit risk.

3 Credit Control – Invoices and Payment Terms

Always state clearly on sales invoices the agreed payment terms and payment date. 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 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 October 12, 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 contact us.

Please ignore this letter if payment has been made in the last 3 days.

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 14 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 debt collection 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 oversee your effective credit control process, 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, up to 95%. They will then collect the money from the customer and pay you the balance, less any fees agreed upon by the factoring company.

Factoring relieves the cash flow stress and allows for time for credit control. However, the disadvantages are that you do not get all your money and 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 credit control 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 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.

The government website provides much information on how to do this. The site explains how to claim, procedures, and costs. You may also make a claim online using Money Claim Online through the government website.

By implementing these procedures, businesses can significantly improve their credit control efforts, reduce bad debts, and ensure a healthy cash flow.

Credit Control Processes Conclusion

By implementing proactive measures and following best practices, you can safeguard your cash flow, minimize bad debts, and build stronger customer relationships.

Remember, credit control is not merely about collecting payments; it’s about establishing a framework that fosters financial stability and supports sustainable growth. From conducting thorough credit checks to setting clear payment terms and utilizing accounting software, each step is vital in ensuring your business thrives in the long run.

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