6. Manage Control Grow

Control - Credit

What is Credit Control?
Credit control is about controlling the amount of credit that your business allows. It is the art of preventing all credit arguments by putting systems in place that will avoid these types of situations.

There are 3 elements to good credit control:

  1. Have a good credit control system in place.
  2. Set correct procedures in place.
  3. Have experienced credit control staff looking after this side of the business.

Every business needs to have a sound credit policy in place. This policy must be designed in such a way that the end result is that every sale will be paid for by the customer. A sale is not a sale until it has been paid for.

Unfortunately, many business owners push hard for sales and then simply wait in hope for the customer to pay the invoice on time. This is fine if the customer pays when the bill is due. The reality, however, is that most customers will pay when they have the ability to pay, or when they feel like paying.

It is therefore not enough just to wait until the customer is ready. A system must be in place, which not only encourages the customer to pay, but in some cases will force them to make payment. (For example, if they want further purchases approval is not given until the last bill has been paid.)

The Basics Rules of Credit Control
When you grant a customer time to pay their account you are in fact lending them money. You also trust them to pay you back on time. If they don’t pay you back on time then all sorts of problems will arise. It affects your cash flow resources and may put strain on your ability to run your business.

This is made even worse if the customer ends up not paying you at all. You not only lose the cost of the products sold, but you also lose the profit you would have made.

Here are some rules that should be basic in any credit control situation:

  • Rule 1: Don’t give credit to any customers if you can possibly avoid it.
  • Rule 2: Only give credit if it ensures an increase in sales and you are confident that you will be paid.
  • Rule 3: Make sure you have a sound credit policy in place and don’t deviate from it. For example, it should set credit limits and the criteria for granting credit to any customer.
  • Rule 4: Never grant credit until you have fully investigated the customer, assessing all the information he/she has provided in the application. You should also carry out credit checks to see how he/she has performed paying other businesses.
  • Rule 5: Make sure you have in place experienced and firm managers or staff who look after this very important control area.

Ways You Can Control Credit
Here are some suggestions to consider when looking at putting proper credit management facilities in place:

  • Make sure your terms of trade are clear.
  • Ask the customer to sign acknowledgement of the terms.
  • Make sure you get full credit reports on all applicants.
  • Find out about, and know who your customers are.
  • Make sure the terms include late payment fees for accounts that are not settled on time.
  • Make sure that the invoice clearly states the terms, as well as full details of the transaction.
  • List full details of the customer so they can be contacted when the debt becomes due.
  • Make sure you have a good accounting and credit control system in place.
  • Have standard letters sent out immediately once payment is due.
  • Have procedures in place to be undertaken when a payment is overdue – this may involve calling the customer personally or sending a serious demand. It could even involve a legal letter from your lawyer or debt collector.

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