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Credit Management & Control

Credit Managment and Control

There really is no such thing as a definitive credit management policy. However, there is good practice and bad practise. It is important that your policy meets the needs of your business and the particular vagaries of the industry sector.

In addition, even when there is a formal policy there may always be exceptions you want to make for favoured or important customers.

The important thing in the whole process is to take appropriate action sooner rather than later. Any action taken must be appropriate to the circumstances. To delay taking appropriate action can at best result in delayed receipt of payments and at worse result in the creation of a bad debt.

There are various key stages involved in the management of credit.

1) Credit check your customers.
Before you issue credit to new customers you should first evaluate their ability to pay.
There needs to be a standard credit application form issued to any new customers prior to any credit being granted.
There are several ways of credit checking customers. Bank and/or trade references can be useful. Trade reference contacts can be obtained through the application process. Whilst they can form part of the decision process they should not be relied upon exclusively.
One of the best ways to check the credit worthiness of a customer is to purchase a status report from a credit agency. This will give details of financial results, payment history, any county court judgements and other valuable information.
This information can be purchased either on an ad-hoc basis or through subscription.

2) Re-evaluation of existing customers from time-to-time.
Circumstances change so don’t assume that a business with a good credit rating today will continue to retain that status. Use experience and knowledge of the customer to spot any potential problems. For example, if a customer starts paying later and later it could mean that they are having financial difficulties.

3) Use discretion and judgement
If a check reveals a less than perfect credit history, it doesn't automatically mean you shouldn't do business with that customer. It does, however, allow you to make an informed decision. You may, for example, ask them to pay part of the bill up front; give them a shorter payment terms; or chase the payment earlier and harder.

4) Set Credit Limits
Establish credit limits and stick to these. Most accounting software packages will allow you to set limits for your customers and highlight when those limits would be exceeded. The limits need to be reasonable in terms of the level of business but also limit the amount of exposure you are prepared to accept. When credit limits are exceeded these need careful review, and appropriate action taken, i.e. chase and receive payment before further credit is granted or formally increase the credit limit. Credit limit increases must be signed off by senior management.

5) Establish your terms of trade
Your terms of trade, also called conditions of sale or terms and conditions, protect your rights as a seller. They should include payment terms.
The buyer will have his or her own terms of trade which may include their own payment terms. Any difference in payment terms should be clearly established at the point of sale.

6) Make sure you have full customer details
Make sure you know exactly who the customer is. If there is a problem with payment, it will help considerably if you have full customer details. This includes contact names, address, phone and fax numbers, email address, VAT number, registration number (if limited). It is useful to build up a relationship with the person/s responsible for the payment of invoices. It helps considerably in bringing your payment to the top of the list!
You should also find out when that company usually pays their bills - do they usually do their cheque runs at the end of the month, for example. This will help you establish a realistic payment date.

7) Invoice promptly and accurately.
Invoices should be issued within 24 hours of service or product being provided or realistically as soon as practical thereafter. They should contain all the necessary information and should be accurate. This avoids delays in payment while details are checked.

Invoices should contain the following information:
• Name and address of the company making the sale
• Name and full phone number of person to address queries to, i.e. the person responsible for sales accounting
• Invoice number
• Order number/reference
• Description of goods or services
• Unit price
• VAT number, amount and rate (if registered for VAT)
• Total amount due
• Payment due date
• Payment terms

8) Track unpaid invoices
Once you've done all this, it is sadly not just a case of sitting back and waiting for the payments to roll in.
Carefully monitoring of debtors balances as they age is required. An Aged Debtor Analysis report which tracks invoices until they are paid.

It is possible to track each invoice, keep an eye on what is due when, and phone major accounts before the due date to check there will be no problems with payment. This boosts your chances of receiving a prompt payment.

This is however time consuming and need only be used where the amount justifies such action and/or the customer is showing a tendency to pay late.

It also makes it easier to see when invoices are overdue - and by how long - thus triggering your debt recovery process.
You should check your Aged Debtor Analysis report once a week, and make sure it's up-to-date. All payment receipts, both cheques and electronic, should be entered onto your accounting system prior to running the Aged Debtor Analysis report. It is embarrassing to chase payment when your customer has paid and you have simply not recorded the payment.

9) Collecting the cash
Many customers will do the decent thing and pay up, in full, on time. Some won't.
This could be a simple oversight, an administrative delay or perhaps they're waiting for payment themselves. Whatever the cause, the more actively you pursue the debt - without getting aggressive - the more chance you have of actually getting paid. They will be able to tell that you are serious and that, politely of course, you won't leave them alone until you have received payment.
When an invoice falls overdue a debt recovery cycle should swing into action. This should be graduated to reflect the amount and the period that the payment is overdue.
• The first stage of the process should include phone calls, followed by letters, faxes and e-mails. It is very important to keep detailed records relating to this process. For telephone calls, details should be logged in relation to date and time of the conversation, the contact name and their position, the nature of the conversation, any promises made and follow-up action required with dates as appropriate.
• If any promise is broken it is important that follow-up action is taken promptly. If verbal requests are ignored it is important to follow-up with formal written requests. There should be at least 2 stages to the written process. A gentle reminder which if ignored should be followed up by a more formally worded letter.
• At some stage a decision must be taken to cut-off the provision of services to that customer. This needs to be a balanced decision.
• The final stage has to be referral to a solicitor or debt collection agency.
This latter stage will cost you money and compromise goodwill so you should only use it as a last resort. Do not be tempted to threaten legal action if you have no intention of actually using it - your customer might just call your bluff, and once you've failed to do it the first time he'll never fall for the empty threat again.

You also need to decide whether or not you want to make use of the Late Payment Act. This gives you the right to charge interest on overdue debts.

10) Communicate
The final stage in the process is to tell employees what the policy is. This means that you can insist they follow a set process and consult you (or other senior decision maker) if they feel the need to deviate from the set policy.

11) Make provisions
Whilst good credit management should minimise the risk of bad debts, inevitably bad debts will hit from time to time. It is good practise to include within the monthly management accounts a provision for bad debts. Whilst this does not help the adverse impact from a cash-flow, it spreads the risk within the Profit and Loss. The provision is normally based on a percentage of sales. Any general provision needs to be reviewed on a monthly basis to ensure that it is reasonable.

Amel (UK) Limited can assist you with your Credit Management, either by establishing a credit managment policy and providing training or we will undertake all of your credit management on your behalf.

12) If all else fails it is now possible to pursue your debts legally online using money claim online. Money Claim Online is a simple, convenient and secure way of making a claim on the internet. With Money Claim Online you can keep an eye on the status of your Claim, Judgment and/or Warrant. You will be asked to pay the fees to issue Claims and Warrants online by Debit or Credit Card. To view the money claim website go to: www.moneyclaim.gov.uk/csmco2/index.jsp




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