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The importance of a credit control policy
With debtors as the largest asset on the balance sheet, efficient and professional credit management is essential for maximising profitability. Just as it is important to manage production, sales and stock, so it is important to manage credit.
An effective credit control strategy will have three things - a credit policy, a process for debt collection and a monitoring system to constantly review a customers’ financial health. Each needs to be mutually supportive to gain maximum benefit.
For growing companies, the priority is usually chasing sales and driving up revenues. Credit control is rarely given much consideration when a major new order is won. Instead, the reaction is one of gratitude, excitement and relief. But it is worth pausing for a moment and asking about payment terms, explaining why, in servicing the order, it is important for invoices to be settled strictly on time. Forgetting to spell this out at the beginning is a sure way to start to put pressure on cash flow.
A Credit Policy is an important document. It provides internal controls to ensure that selling and collecting on credit are handled efficiently and in the best interests of the company. Because of this, many companies see it as a financial tool that not only protects the financial health of the company, but also ensures a high level of customer service. The Policy, once formulated, should be reviewed regularly as outside influences may require changes in the overall corporate credit plan.
With a credit control policy in place, businesses also need to ensure they have the right business and accounting software to support the debt collection process or use an external credit management service. The traditional method of chasing payment by letter is time-consuming, both in terms of the administration and the speed in which the information can be conveyed and expensive. An electronic debt-chasing process, linked to the financial accounts, is really the only way. Such packages build chase lists in order of priority, displaying the relevant customer information at a glance.
Use the facilities within sales to monitor and raise debt problems and perhaps restrict credit. All sales members should have regular credit reports and be expected to manage the customer’s debt as well as service them and take orders.
When debtors continually ignore demands for payment, businesses should have an escalation process to deal with such debts in a timely manner. Most business and accounting software systems include an in-built escalation process that allows aged debt records to be flagged by debt status and set for the attention of the person or department equipped to take the debt chase to the next level.
Increasingly, slow payers are being served with Petitions for Compulsory Winding Up, as creditors recognise their use as one of the most effective methods of securing payment. During this time, these companies can appear to be trading normally, but in reality they face serious financial problems. One way to monitor exposure is by using a weekly insolvency listing service. Data from these services can be uploaded straight into your accounting system and matched to your existing customer base. This immediately highlights the real financial state of a business, and gives creditors the chance to collect outstanding monies and stop extending further credit.
To find out more about our outsourced credit control services, please contact us.
