What is Credit Control and Why is it Important?
Credit control is the process a business uses to ensure that it gets paid for the goods or services it provides. It involves setting credit limits, monitoring customer payments, and taking action to recover any outstanding debts.
Why is credit control important for small businesses?
- Increased profitability: Credit control can boost a business’s profitability by reducing bad debts and improving cash flow. This can free up funds for reinvestment and growth, leading to greater success in the long term.
- Improved cash flow: Small businesses often have cash flow problems, so late payments can significantly impact their ability to pay their bills and invest in growth. An effective credit control process helps to ensure that invoices are paid on time, improving cash flow and reducing the risk of financial difficulties.
- Reduced bad debts: By carefully assessing customers’ creditworthiness and monitoring their payment history, businesses can reduce the risk of bad debts, saving them significant amounts of money in the long run.
- Stronger customer relationships: Good credit control doesn’t have to involve aggressive debt collection. Businesses can build stronger relationships and improve customer satisfaction by clearly communicating payment terms with customers and offering support when needed.
- Better planning and forecasting: Effective credit control gives businesses a clearer picture of their future income, making it easier to plan and forecast. This can help them to make informed decisions about investments, staffing, and other essential matters.
More businesses rely on accounting software as part of their credit control, as it can send automatic reminders and statements. If you don’t have time to complete credit control, you can outsource it to an agency. However, remember that outsourced credit control will incur fees and expenses for the business.
Credit Control Policy
A Credit control policy is vital for a successful business because it helps to ensure that its customers pay them on time and in full. Companies can minimise the risk of late or unpaid invoices by setting clear terms and conditions. In addition, a credit control policy can help businesses improve their cash flow and better manage their budget. By having a clear policy in place, companies can reduce the chances of financial difficulties in the future.
Everyone in the business who deals with customers must understand and apply the credit control policies. This includes salespeople, who initiate contact with the client, and accounting staff, who oversee debt collection.
What Should be Included in Credit Control Policies?
Depending on the size of the business will depend on what is required for an effective credit control process; some things worth including are:
Set Clear Terms and Conditions for Customers
Setting clear terms and conditions from the outset is essential when extending credit to customers. This will help avoid any misunderstandings later. Ensure that the payment terms or credit period 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 of late payment would be. This could include charging interest, imposing additional fees, or suspending credit facilities. By clearly setting out your terms and conditions, 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. Several factors are considered when determining credit risk, but one of the most important is whether or not the customer has a poor credit history. 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 consider extending credit to customers and setting credit limits.
Monitor Customer Account Activity
Part of good credit management is monitoring 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 potential problems and take action to resolve them.
Implement a Debt Collection Process
If customers pay late, it is crucial to have a credit management process in place. This process should be fair but firm and carried out professionally. The aim is to collect the outstanding debt without damaging the customer’s relationship.
Businesses can use several debt collection methods, including sending reminder letters, making phone calls, or speaking to the customer in person. The ultimate goal is to expedite debt collection while preserving positive customer relationships.
Educate Staff about the Credit Control Policy
Everyone in the business must understand the credit control policy and how it works, especially a credit controller. This includes sales staff, customer service staff and accounting staff. By educating staff about the credit control policy, businesses can help ensure it is consistently implemented.
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, the person to contact, where to send invoices, bank details, and two 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 Process
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. Sitting back and hoping the money will be paid on time is no good. Here are some ideas that you may want to include.
Aged Debtors
An aged debtors report shows a complete list of all the sales ledger money outstanding from customers. As part of credit control, you should run an aged debtors report regularly 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 are accurate, including as much detail as possible. The credit terms and a due date must be included on the invoice. 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
Customer statements serve as helpful reminders and encourage prompt payment. Most accounting software packages, like QuickBooks and Xero, can automatically email statements.
Phone calls
Depending on your customer, you may want to phone to ensure the invoice has been processed. Phone before the invoice is due to ensure that the payment is processed on time.
If payment has not arrived on time, you will need to phone again. It can be difficult to balance ensuring the payment is made on time and calling too often.
Credit Control Letters
If payment is late, the next stage of the credit control process is sending a reminder letter for overdue accounts. 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 do not receive a response to a 7-day letter, you will have to consider 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, this can save a lot of time for credit control.
Late Payments
Late payments are a massive problem for small businesses; they can cause severe cash flow problems.
If payment is continually made late, it is worth reviewing the credit terms you have agreed with your customer; sometimes, you must withdraw credit completely or request a deposit.
Debt Collection Agency
Outsourcing credit control can be helpful for businesses struggling to recover outstanding payments. However, before taking this step, it’s essential to understand the process and potential implications.
When to consider using a debt collection agency for credit control:
- Persistent late payments: If a customer consistently fails to pay on time despite your credit control system and sending reminders and attempts to negotiate, it may be time to involve a collection agency.
- Unresponsive debtors: When customers ignore invoices and communication attempts, an agency can help track them down and initiate contact.
- Significant outstanding amounts: Agencies have more resources and expertise to pursue recovery for large debts that significantly impact cash flow.
- Freeing up internal resources: Chasing debts can be time-consuming. Using an agency allows staff to focus on core business activities.
Process of using a debt collection agency:
- Selection: Choose a reputable agency with experience in your industry and a clear understanding of relevant laws and regulations.
- Documentation: Provide the agency with all necessary documentation, including invoices, contracts, and communication records.
- Fees: Understand the agency’s fee structure, which may involve a percentage of the recovered debt or a fixed fee.
- Communication: The agency will contact the debtor and attempt to negotiate payment. They will keep you informed of their progress.
- Legal action: Sometimes, the agency may recommend or initiate legal action to recover the debt.
Potential implications:
- Cost: Agencies charge fees, which can reduce the amount recovered.
- Reputation: Aggressive collection tactics could damage your customer relationships and business reputation.
- Control: You relinquish some control over the collection process when using an agency.
- Legal considerations: Ensure the agency operates within legal and ethical guidelines to avoid potential liabilities.
What is Credit Control Conclusion
A robust credit control process is vital for the financial health of any business, especially small businesses with limited resources. By implementing robust credit management procedures, including clear credit policies, thorough credit checks, and consistent payment monitoring, businesses can significantly reduce the risk of bad debt and improve cash flow.
This proactive approach protects the company’s finances and fosters stronger customer relationships through clear communication and support. Ultimately, prioritising credit control empowers businesses to make informed financial decisions, optimise profitability, and achieve sustainable growth.
Read more about the credit control process.
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