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Monday, June 16, 2014

Every business needs strict credit control

Credit control is often considered to be a complicated process in the world of finance, but once understood it becomes a valuable tool to ensure customers pay for products and services you provided in a timely manner. And whether your business is a large corporation, SME or start-up, credit control should be standard practice, as ensuring collection of money owed can be a significant factor in the overall success of the business as late payments affect cash flow and supply chain management.

What exactly is credit control?

Business credit control tips
An effective cash conversion cycle benefits business cash flow
In simple terms, credit control is when a business grants credit to customers with a good credit rating - meaning they pay their dues on time and in full. It can act as a mechanism to create customer loyalty and repeat business over the long term. Ideally every business should strive to establish a credit system with their customers, but it comes with high financial risks due to the possibility of creditors not paying, and the tedious administrative and legal processes required to obtain payments can be off putting.

Establishing clear channels of communication with credit customers is key, and there are so many modes to communicate with them - email, letter, fax, text or telephone. As a credit provider, the business should communicate with due diligence to ensure their customer is informed of payment options for every step of the process. A credit controller should communicate and engage with customers regularly, as this will maintain the business relationship, and avoid any moments of confusion when it finally comes to the customer paying their bill. And it is far less frustrating than having to manage huge amounts of debt.

What can be done to accelerate slow payments?

No business operates the same, and different business models require credit control systems tailored to their model. Here is some useful information regarding credit control that is applicable to most businesses:
  • Understanding the customer’s credit history and supply chain can help determine their suitability for credit, as it indicates how likely and when they are going to pay. They may request credit or delayed payment from you due to their creditors not paying them.
  • Accurate information on credit statements, with details of interest, penalties and payment dates must be clearly communicated as often and as regularly as possible. Include contact details to ensure any concerns can be clarified easily.
  • Contact creditors before the payment date to confirm the receiving of the funds on the mentioned day.
  • Notify customers of late payments or lack of funds received immediately after payment date, indicating the penalties incurred. There may have been an incorrect payment processed on their side and transferred into an incorrect account.
  • Initiate a supply stop if non-payment occurs for a prolonged period, as a warning to the creditor. Although, exercise this with caution as they may contract another supplier and put the company out of business and out of pocket.
  • Should all else fail, debt collectors operate on ensuring payment of funds from unreliable credit customers, and relieve the administrative headache.

Obtaining early and regular payments from customers is vital for any business, in an ideal world this would be the standard. In reality however, varying business strategies, financial policies and suppliers will always operate to their own agenda. Not implementing structured systems of informing creditors of payments due can often lead to missed or delayed payments, and the longer the time taken to settle the less likely it is to happen. Primarily, credit control systems conform to established practices and procedures that are customer oriented to ensure safe, easy payment, and are not intended to threaten or jeopardize them. Yet they are an essential safety net to use when the risk of delayed payments threaten the core businesses cash flow.

Image license: Purple Slog, CC BY 2.0
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