Often, when meeting people for the first time, whether it be in a business environment or social gathering, the question comes up along the lines of “What line of work are you in?” Once I start mentioning credit management, invariably somebody will then say “Oh, you are a debt collector, then.” This is a misconception because credit control (credit management) is so much more than just collecting debt, much of which precedes the stage of actually obtaining payment from a customer. In this first article, let us examine what credit control is all about.
Fundamentally, it is the policy adopted by businesses to allow customers to buy their products or services now but extending a period of time for the customer to pay for the goods. The great advantage is that sellers are able to increase their sales significantly by offering this ‘buy now, pay later’ facility. Let’s face it, how many houses or even cars would be sold if customers had to pay the full amount immediately?
In turn, higher sales should then lead to higher profits, but this will only happen if you carefully control and monitor the credit being given to customers. Therefore, companies use credit control as a tool to boost sales. Most businesses aim to provide credit facilities to customers with a good credit history to try and ensure that payments will be made on time. In this way, you are ‘controlling’ who you give credit to and how long you are giving them to pay.
Non-payment and even late payments by customers are likely to lead to cash flow problems for your business. Cash is critical because regardless of when your customers pay, you will still need to pay salaries, suppliers, overheads, and loan repayments on time each month. Without meaning to sound like the grim reaper, most businesses who become insolvent do so due to lack of cash rather than profits. This is why robust credit control processes are so important.
So, what else does credit control involve? The invoice is a vital element; it acts as legal evidence of work or products which have been provided to your customer. Therefore, the design and layout of the invoice is key as well as your invoicing process. You should aim to send invoices to customers within 24 hours of providing your goods or services.
Building and maintaining relationships with customers is an essential element of credit control as well providing an opportunity to increase sales. Prioritising the high value/high risk debts will ensure you keep on top of your cash flow and, of course, you must deal with problem payers. Having set procedures in place for onboarding and managing customers should be laid out in a credit policy document and I will be discussing this and other factors over the coming months.
Credit control is not an easy job; it requires organization, tenacity, professionalism and understanding. Often the role involves being a detective, an accountant, a negotiator, a salesperson, a relationship manager and even a problem-solver. However, effective credit control is a requisite for maximising profits and minimising risk.
Kevin Artlett FCICM ACII