What is Credit Control and Why is it Important?
Credit control is a system businesses use to manage their credit risks and collect outstanding debts. It includes assessing potential customers’ credit risk, setting credit limits, and monitoring customer account activity. By doing this, businesses can minimise losses from bad debt and protect their profits. Credit control is an essential part of any business and should be taken seriously.
Credit Control Policy
A Credit control policy is important for businesses because it helps to ensure that they are paid on time and in full by their customers. By setting clear terms and conditions, companies can minimise the risk of late or unpaid invoices. In addition, a credit control policy can help businesses to improve their cash flow and better manage their budget. By having a clear credit control policy in place, businesses can reduce the chances of financial difficulties in the future.
Everyone in the business who deals with customers should know the credit control policy and how it is implemented. It includes salespeople with initial contact with the client and accounting staff dealing with collecting the debt.
What Should be Included in Credit Control Policies?
Depending on the size of the business will depend on what is required for a credit control process; some things worth including are:
Set clear terms and conditions for customers
When offering credit to customers, it is important to set clear terms and conditions from the outset. it will help to avoid any misunderstandings further down the line. Ensure that the payment terms are clear. Early payment incentives can be a great way to encourage customers to settle their invoices promptly.
However, it would be best if you also made it clear what the consequences will be for late payment. This could include charging interest, imposing additional fees or suspending credit facilities. By setting out your terms and conditions clearly, you can help ensure that you and your customers are on the same page.
Assess customer credit risk
By continually assessing credit risk, businesses can minimise the chance of bad debt and keep their finances healthy. There are several factors to consider when determining credit risk, but one of the most important is whether or not the customer has a history of late payments. If customers are habitually late on their payments, they are more likely to default on their debt, which can seriously impact the business’s bottom line.
You may also need to consider extending credit to customers and setting credit limits.
Monitor customer account activity
Part of good credit management is to monitor customer account activity regularly. This includes keeping an eye on outstanding invoices and payments that are due. By periodically monitoring customer accounts, businesses can quickly identify any potential problems and take action to resolve them.
Implement a debt collection process
If customers pay late, it is crucial to have a debt collection process in place. This should be fair but firm and should be carried out professionally. The aim is to collect the outstanding debt without damaging the relationship with the customer.
Businesses can use several different debt collection methods, including sending reminder letters, making phone calls or speaking to the customer in person. Ultimately, the aim is to get the outstanding debt paid as quickly as possible without jeopardising the relationship with the customer.
Educate staff about credit control policy
It is important that everyone in the business understands the credit control policy and how it works. This includes sales staff, customer service staff and accounting staff. By educating staff about the credit control policy, businesses can help to ensure that it is consistently implemented across the board.
Complete a credit check on the company
Before you offer a new client credit, it is worth checking if they have a good credit rating. Several companies offer this service for a small charge. Experian off business credit checks and have a free trial available.
Many businesses request that a credit application form is completed. This form will require information on business details, person to contact, where to send invoices, bank details, and 2 trade references. Ensure you request the references; they are the best people to know the business and whether it is worth offering credit.
Make sure you agree to a credit limit and payment terms. If these terms are not kept, you may have to consider reducing or removing the credit account. A business with a poor credit rating can be worse than not having a customer.
Credit Control Procedures
The person who runs the credit control is called a credit controller. If you are a small business, you may have to request money from your customers yourself.
It is worth agreeing with your business on the procedures your company will take to collect the money. It is no good just sitting back and hoping the money will be paid on time. Here are some ideas that you may want to include.
Aged Debtors
An aged debtors report shows a complete list of all the money outstanding from customers. As part of credit control, you should run aged debtors regularly report to check for outstanding balances. We have an aged debtors template if you need to set it up.
Sales Invoices
Ensure that invoices are sent out as soon as possible and accurate, including as much detail as possible. The payment terms and a due date must be included on the invoice. Using accounting software helps create a professional-looking invoice and includes a payment option to pay by credit or debit card. Making it easier to pay may reduce the time spent on credit control.
Statements
Send out customer statements regularly; these can act as a gentle reminder that you are owed money. Most accounting software packages like QuickBooks can email statements automatically.
Phone calls
Depending on your customer, you may want to phone to ensure the invoice has arrived and is being processed. Phone before the invoice is due to ensure everything is in order for the payment to be processed on time.
If payment has not arrived on time, you will need to phone again. It can be very difficult to get the balance between ensuring the payment is made on time and calling too often.
Credit Control Letters
If payment is late, the next stage is sending a reminder letter. If you still do not receive payment, it is worth sending a 7-day letter stating that legal action will be taken if payment is not made. Although this may sound rather harsh, if a company is short on finance, they will delay payment until they receive this letter.
Here is a template for a 7-day letter.
Legal Proceedings
If you receive no response from a 7-day letter, you will have to consider the options for taking legal action to recover the debt. There are a couple of options available, either do it yourself with Money Claim Online or get a solicitor to do it for you. Using a solicitor or debt collection agency is more expensive but will save you time preparing some paperwork.
Cash Discounts
Some businesses may offer a cash discount for early payment, typically 2%. This is a way of encouraging customers to pay on time. The customer will need to know that the discount is available and the date by which they need to make the payment.
Late Payments
Late payments are a huge problem for small businesses; they can cause severe cash flow problems.
If payment is continually made late, it is worth reviewing the credit terms that you have agreed with your customer; sometimes, you will need to withdraw credit completely or request a deposit.
What is Credit Control Conclusion
Credit control is an essential part of any business. By implementing the correct credit management procedures and by regularly checking a company’s credit rating, you can ensure that you are not left out of pocket. If payment is continually late, it may be necessary to take legal action to recover the debt.
Effective credit control by a small business can help with cash flow and reduce the risk of bad debt.
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