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What is Credit Control and Why is it Important?
Maintaining robust cash flow and getting paid on time is essential for any business, but collecting payments for goods and services rendered can often be easier said than done.
Between late invoices, forgetful or disputing customers, and administrative mix ups, many businesses struggle to effectively manage credit and accounts receivable.
This is where an effective credit control process comes in. Credit control refers to the methods and policies that allow a business to manage credit available to customers and collect payments in a timely manner. This includes setting clear credit terms, sending invoices, following up to ensure prompt payment, and employing debt collection if needed.
For small and mid-sized businesses especially, having an airtight credit control system can be a major factor in operational success and accelerated growth. Businesses that develop good credit control habits reduce days sales outstanding, improve cash flow to reinvest and scale, and build positive relationships with customers.
Those with poor procedures see declined revenue, cash shortages, and friction with customers who face everything from gentle payment reminders to stern collection calls.
In this comprehensive guide, we’ll explore major topics around business credit control and management including:
- Key definitions and concepts
- Processes and best practices
- Tailoring credit control for small business needs
- The intersection of credit control and debt collection
- Leveraging outsourced services for efficiency
Whether you are looking to set up credit control processes for the first time or optimise existing systems, this in-depth article will arm you with new knowledge. Now let’s dive into the specifics of how businesses large and small can benefit from sharper credit management.
Defining Credit Control
Before diving deeper into process specifics, let’s clearly define credit control and how it fits into the broader credit management picture.
Credit management refers to all policies and activities related to granting credit, taking on credit risk, and recovering amounts owed by customers of the business. This is a huge area impacting everything from sales to accounting.
Credit control sits within credit management and focuses specifically on the payment collection process. The credit control department or team carries out important functions like:
- Verifying and updating customer contact information
- Issuing invoices with clear payment terms
- Sending out payment reminders as needed
- Working with customers on queries or disputes
- Providing early payment discounts/incentives
- Determining when to involve debt collectors
- Reporting on payments and revenue status
Robust credit control procedures are essential for accounts receivable teams to employ. Automated reminders and follow up systems mean less late payments slip through the cracks. Established escalation protocols let staff take appropriate actions matched to payment delays.
On top of procedures, formal credit control policies also guide the credit and collections approach. Leadership defines the standard payment terms available to different customer tiers, credit limits based on factors like purchase volume or credit history, and consequences for continued delinquency.
Getting these foundational policies and procedures squared away makes every subsequent credit control process flow more smoothly. Staff across the organisation understand guidelines to follow and have continuity even with employee turnover. Now let’s look at why strong credit control is so vital for small business success in particular.
Leveraging Credit Risk Assessment
Before even establishing payment terms or expectations with new customers, it’s important to have a system for analysing potential credit risk. The scale and formalisation may differ depending on business size and industry, but some standard factors to consider include:
- The 5 C’s: Character, Capacity, Capital, Collateral, Conditions Evaluating these five components provides data points to estimate the likelihood of customers paying on time. Character refers to their reputation and history, Capacity to their cash flow and leverage ability, Capital to their net worth. Collateral accounts for assets backing the debt, while Conditions reflect market trends relative to the entity's performance.
- Automated Credit Checks It’s now easier than ever to run credit reports to gain financial transparency into commercial clients before finalising a contract. Manual verification steps are also critical if automated reporting is unavailable.
- Ongoing Reviews A single risk rating snapshot has some value, but regularly monitoring indicators allows proactive decisions as circumstances evolve. Are payment due dates being extended? Have reported revenues dropped? Updates may signal a need to revise credit terms.
Robust evaluations protect against volatility, minimise bad debt write-offs, and surfaces red flags early enough to engage with struggling customers. Next let’s look at enabling efficiency at scale through automation...
Streamlining Workflows With Automated Systems
While informal credit control works for very small customer rosters, manual payment chasing quickly becomes unwieldy. Once a businesses amasses dozens of business clients, investing in account receivables software centralises key functions:
Integrated Billing and Reporting
Automated interfaces with accounting platforms gives real-time visibility into aged accounts payable across the whole customer portfolio.
Payment Reminder Triggers
Pre-configured rules can automatically send late payment reminder emails and letters based on escalating delays. No missed follow-ups if a staff member is out sick or busy with other priorities.
Analytics Dashboards
Understand rolling trends across average days outstanding, first time payment rates, disputes volumes and more. Forge improvements based on hard metrics instead of hunches or hearsay.
Real-Time Account Notifications
Get instant push alerts on updates like a specific customers sending a partial payment. Log in to databases anytime for on-demand reporting across devices.
Technology delivers the consistency and efficiency needed for enduring credit management. Now let’s dive into options businesses have for outsourcing with experienced partners…
Leveraging Outsourced Credit Control Partners
Thus far we’ve covered critical components of internal credit management operations. But for many small and mid-sized businesses, handling all aspects of credit control in-house isn’t realistic. Limited budgets and headcount make staffing a full-fledged administrative collections team impractical.
Fortunately, outsourcing providers exist to seamlessly manage account receivables and credit control workflows. Outsourced credit control partners offer expertise and bandwidth struggling firms desperately need. Typical benefits include:
Saving Money
Avoiding high-overhead salaried roles like Credit Control Manager and supplementing with flexible, project-based contracts reduces expenditures. Only pay for what you use.
Gaining Experience
External teams independently handle hundreds of other client cases across every industry vertical. That produces specialised insight less feasible internally.
Improving Customer Relationships
Having a dispassionate 3rd party initiate delicate debt collection discussions or legal proceedings causes less friction with existing patrons.
Increasing Operational Flexibility
In-house subsets of the credit control workflow can continue while outsourcing any aspects too burdensome handles the rest. This “hybrid model” offers flexibility.
Reputable managed service providers ultimately amplify cash flow and revenue collection with fewer headaches than tackling the full spectrum of credit control solo. And leveraging both technology tools for scalable efficiency with trained outsourced teams offers an optimal path.
Key Takeaways of Credit Control
We’ve covered a wide array of considerations for efficiently managing credit, payments, and accounts receivable - a mission-critical area for organisational success. To recap, some core lessons for both early stage companies and mature businesses include:
- Develop Clear Credit Control Policies Document specifics like standard credit terms per customer tier, collection protocols by days past due, and processes for disputing charges. Evolve as needed.
- Automate Where Possible Leverage technology to minimise manual work in sending invoice reminders, cross-checking ageing reports, and more repetitive tasks. Custom solutions or outsourced partnerships can provide this.
- Outsource For Expertise and Cost Savings Specialised managed service providers like EFF offer tailored outsourcing for credit control based on unique business needs and budgets. The collective experience benefits relative to in-house-only approaches.
- Practise Consistent Communication
From sales call notes on expected new business to AR clerks commenting on a delinquent account status, keep relevant stakeholders looped in through centralised databases. Be proactive both internally and with credit-approved customers.
While every company faces some collection challenges at points, following protocols that align with the best practices we’ve discussed will minimise friction and keep cash flowing smoothly.
Reach out now to explore outsourced credit control partnerships perfectly suited for your operations unique needs.
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Author: Klaudia Rydz, Senior VAT Compliance Specialist at EFF