Understanding credit control and its process

credit controlCredit control is the process of managing a company’s credit risk. This includes setting credit limits, monitoring customer creditworthiness, and taking action to reduce bad debt.

Effective credit control is essential for businesses of all sizes, as it helps to protect against loss and ensure that customers can still make purchases on credit. There are a number of different methods that can be used to achieve good credit control, but the most important thing is to establish clear policies and procedures.

By doing so, businesses can help to minimise the risk of financial difficulties and ensure that they continue to operate smoothly.

All businesses require a robust credit control system, regardless of whether they are big or small: strong credit control will get you paid quicker, and that is useful for your business. Likewise, by promoting timely payments, viable credit control can assist you with staying away from debt collection procedures or obtaining and writing off bad debts.

We are going to walk you through what credit control really is, and how you can create a robust credit control system.

What is credit control?

Credit control is a business cycle that promotes the selling of products and services by extending credit to customers, covering things such as credit period, cash discounts, payment terms, debt collection policies and credit standards.

As a rule, credit control is a method for making it simpler for your clients to buy your organisation’s products and services by offering alluring payment terms, thus making the act of purchasing far more appealing. Productive credit control can bring about better sales and increased profits for your business.

Yet, a significant area of credit control is deciding to whom you can dependably be extending credit. Awarding credit to customers with bad financial history can result in not being paid for the products and services your company sells them.

Why credit control is utilized by companies

Any business owner knows that cash flow is essential to keeping their company afloat. However, sometimes customers simply don’t pay their invoices on time, which can put a serious strain on the business’s finances. That’s where credit control comes in.

Credit control is the process of managing a company’s accounts receivable and ensuring that customers pay their invoices in a timely manner. There are a number of ways to achieve this, such as setting up payment plans, offering discounts for early payment, or sending reminder emails or letters.

By implementing effective credit control measures, businesses can ensure that they receive the payments they are owed in a timely manner and avoid financial difficulties down the road.

Credit control policies

There are a variety of credit control policies that businesses can put in place in order to manage their exposure to bad debt. For example, many businesses will only extend credit to customers who have a good track record of paying on time.

Others may require customers to provide a deposit upfront before extending credit. And still others may only offer credit terms if the customer purchases insurance to cover the risk of non-payment.

By carefully considering their options and implementing the right policies, businesses can minimize their exposure to bad debt and protect their bottom line.

Distinction between credit control and credit management?

Credit control is the initial phase in guaranteeing you are working with clients who acknowledge your conditions and can pay you as indicated by previously agreed terms.

Credit management is the subsequent stage: it looks to forestall late payment or non-payment through observing, reporting and record-keeping. The more dependable your credit control is, the smoother your credit management interaction is probably going to be.

Fundamental stages of the credit control process

Credit control processes assist you with guaranteeing your organisation’s payment terms and policies remain respected. This includes making those terms clear to both your clients and your credit control group: clarify how you’ll issue invoices, and what you’ll do in the event that they go past due.

Make certain to cover these means:

  1. Ensure you have the right customer data: the right and legitimate name of your customers, including the company’s entity, right location, and later the name of the individual to whom you ought to send the invoice to. Mistakes in something this essential can lead to further invoice-related errors, payments being late and your credit control process going off course right from the start.
  2. Be sure to expose new customers to routine due diligence and perform credit checks: taking a look at funds, notoriety, business and payment history, and so on. Online administrations, for example, Experian.com or Duedil.com can give valuable company credit checks.
  3. Establish credit limits as a component of your credit control process to deal with any potential risks: ask yourself what the biggest outstanding sum is for every one 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. For any assistance, note that a few suppliers, for example, trade credit insurers can assist with verifying customers.
  4. Conduct regular credit control surveys to really look at pending and late invoices. Conclude which customers need following up. Investigate more profoundly into why an invoice hasn’t been paid: has the client ignored it? Lost it? Is there a disagreement regarding the invoice that should be settled?

A piece of your credit control process ought to incorporate when to hand off these issues to your credit control team, so they can talk with the client and think about different ways of recuperating payments: offering different strategies for payment, giving early-payment incentives, or changing the credit terms. You have heaps of options at your disposal.

Establishing credit control procedures

Your business ought to have a formal, composed credit control system or strategy – that is, a set up or official method of accomplishing something – to set up strong, repeatable, working credit control practices.

Getting your credit control strategies down in writing can cultivate a culture of discipline inside your company and guarantee that everybody is adhering to the same rules. These procedures ought to include clear principles for your credit terms, client reviewing and outreach, invoicing process, or late payment process.

Your credit control methodology and credit management depend on your whole business’ involvement and mindfulness, so consider imparting it broadly and of preparing your training team for instance, not only the financial department.

Making your credit control system work

Your credit control framework should make it as simple as possible for your customers to pay you, so set up different payment techniques.

Technology has made it workable for even small ventures to acknowledge online payments without setting up and incurring the significant expenses of merchant banking accounts. Expanding the quantity of payment paths for your customers can smooth out your credit control framework and increase on-time payment rates.

As previously mentioned, ensure your credit management team screens the reliability of your current customers creditworthiness regularly, in addition to the new ones. In delicate financial occasions or in sensitive industries, quarterly audits of customer P+Ls, asset reports, income and future billings will provide you with an ongoing appraisal of their on-going reliability and alarm you to possible issues before they become emergencies.

How and when to compose a credit control letter

Now and again, regardless of your earnest attempts at credit control, customers don’t respect their commitments, and it’s dependent upon you and your team to find a solution. A credit control letter can be a useful avenue to go down here.

Your letter should be straight to the point, factual and formal. Do your best to avoid all unnecessary details, they will only waste time and take away from your overall message. Be sure to carry a serious tone throughout your writing and make things very clear for the recipient.

Focus on the important information, such as how long overdue the debt currently is, and point out what you are going to do if the issue isn’t resolved as soon as possible.

You should remain professional throughout your letter but be sure to put the pressure on your client, as you don’t want this final threat to be ignored. Think of this as a strategic escalation. It is your right to be paid for the work you have conducted, so you should let them know that.

Make sure your attentions are clearly apparent but ensure that you stay professional throughout the entire process.

Outsourced credit control – should you use it?

Outsourced credit control can be the most defensive and most affordable choice for certain businesses. It can free up your time and staff members to seek after promising opportunities that will ultimately take your business forward.

For instance, trade credit insurance is a useful solution for outsourced credit control. It covers your receivables due inside a year against unforeseen business and political dangers (customer insolvency, changes to import and product guidelines, and so on) so your cash flow is defended, and you keep away from bad debt. It incorporates screening clients, monetary data on your customers and prospects, debt collection and compensaion if there should be an occurrence of non-payment.

One more advantage of outsourced credit control is for correspondences with unfamiliar late-paying clients, when local languages, time contrasts, societies and customs are involved. For sure, outsourcing credit control to a global risk insurer guarantees your global credit control is done by nearby agents who know and offer the language and social foundation of your customer. This can fundamentally lessen misunderstandings and make the credit control process more productive.

Business Finance specialist at Invoice funding | + posts

Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.

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