One of the main challenges of running a business is ensuring that the income is more than the expenditure. In this regard, a better control over credit can have a positive impact on your business cash flows.

Every business has issues with customers not paying on time. Add to this the fact that the recovery of business debt could be time consuming, frustrating or even unsuccessful.  Procedures starting from order placement till after sales can be of considerable help. In fact, controls over credit in accounts receivable start with the initial creation of a customer invoice.

Factors that Affect Credit Control Policy

When you establish a credit management policy, there are a number of factors which need to be considered:

    • The first is the amount of profit margin in each sale.  Businesses having low gross profit margin cannot afford significant bad debts. Such companies should have a strict risk assessment in place.
    • The second important factor that a firm must consider is whether it has ‘monopoly’ in the industry.  Businesses that enjoy monopoly would be in a better position to dictate terms and conditions as regards sales.

Once you have an outline for the credit policy, you must divide your credit control into three parts. One is ‘before sales’, the second is ‘ongoing’ and the third would be ‘after sales’. Here are tips for effective credit control using these stages.

Credit Control and Management by Stages

  1. Before Sales

    • Before selling your products, decide what your credit terms will be. Also, make sure that your customers clearly understand the payment requirements. More important than this, your employees need to understand the credit policy. When questioned, they should be able to clearly explain the terms to customers. To avoid any hassles, you could publish the payment terms on your company website or on the invoices if the terms differ from one customer to another.
    • Ensure that your terms of sale allow you to claim charges for late payment. It should also include procedures to deal with disputes, if they arise.
    • Remember that credit involves cost. Do not give credit to all customers. It would be best to set a minimum order limit for selling products on credit.  Also, a credit limit should be set for each customer based on their payment history.
    • Before you sell, learn about your customers. You could perform a credit check on each of your customers through bank references, trade references or their accounts.  Accounts of customer could be downloaded from the Companies Registration Office, if they are firms.
    • Before the sale, collect details such as contact person of the firm, contact address, email, phone numbers, VAT number and registration number, if applicable.
    • Assigning credit score for each customer would be of immense help. If there are doubts as regards any customer, try getting a guarantee from them.
    • Assign a unique customer code for each customer and record the date when payments would become due. To avoid errors, ensure that the signed approval of the credit department is present on all sales orders that are of high value.
    • Put a timetable in place for the sale process. For instance, for 30 days credit, the process would involve several steps including: day 1 – sending the invoice, day 10 – checking the receipt of invoice, and day 35 – checking why payment is delayed.
  1. During or Around the Sale

    • It would be best to check invoices before they are sent out, especially for big orders. This is because the customer may hold up payment till a corrected invoice is sent. It is imperative to include terms such as your bank details, terms and conditions of sale, order number, order value, delivery date, due date, taxes involved and other important details.
    • To avoid any confusion, issue invoices within 24 hours of delivery of the goods or services. It is also important to check whether the delivery is in line with the order, if you want to avoid disputes.
    • A number of customers delay payment stating that they did not receive the invoice. Therefore, always confirm receipt of invoices, especially for large orders. You could also issue frequent statements of account that display paid and outstanding invoices. Many a times, items might get shipped without a corresponding invoice, or an invoice would be sent without delivery. You could do an internal audit to compare billings to the shipping log.
    • Get in touch with your long-standing customers well before the due date. This is so that you know there are no disputes and that payment would be made on time.
    • Keep revising the credit score of the customer as and when you receive payments. Downgrade customers who default on a regular basis.
    • You must also protect your business against late payment. You could levy charges for “bounced checks/direct debits”.
    • Give only 5-6 days after the due date to start chasing late payments. Always chase late payments having significant value, first. Use a set procedure for collections; for example, first you send standard letters, then, you send faxes and then you make calls.
    • Perform a regular monthly review to identify problems with collection and determine courses of action. Consider changing terms of sale for errant customers.
    • Just like you update the credit score, update your cash flow as well. This should be done after seeking credit extension from suppliers and requesting early payments from the best customers. 
  1. After Sales

    • The businesses that have good credit control maintain a good relationship with their valued customers. You could thank customers who pay on time and offer discounts to those who pay early. You could thank customers by sending emails, a post note or through the phone. To get regular payments, you could consider offering a small discount if the customer sets up a standing order.
    • Another important way that you could receive money early is by making it easy for customers to pay. This would be done by accepting settlement of invoices in as many ways as you can. Most payment modes, especially checks, credit or debit cards and PayPal, could be accepted.
    • For difficult customers, harsh methods may have to be taken. You could inform customers you would stop supply when you do not receive payment by a set time past the due date.  You could set different stop policies for different categories of customers. Consider creating documented procedures for handling and resolving disputes.

Effective credit control can go a long way in enhancing your cash flows. Have a rein over your debtors to save your business from cash crunches.

Credit: Senthil Kumaran, Operations Manager – Finance and Accounting, Invensis Technologies