Why is credit control important for a business?

Credit control management is fundamental to all businesses to avoid cash flow problems, to effectively manage your business cash flow and to ensure your customers pay within your credit terms.

Managing you company cash flow is one of the fundamental aspects of operating a business. Many businesses fail due to poor cash flow caused by payment delays and bad debts mounting up over time.

What is the purpose of credit control?

Credit control is simply about making sure your customers dont take too long to pay you.

All invoices you generate should have payment terms stated. These are the number of days you will allow them to pay your invoices.

The credit limits you set are up to you. Many people set these credit terms as 7 days, 14 days, 30 days or even 60 days. If your customers take longer than your payment terms to pay you, youll need to chase them for payment. This is called credit control.

The ultimate aim of credit control is making sure you have cash coming in, when you are supposed to, avoiding cash flow issues and keeping your business cash flow healthy.

What are the benefits of credit control?

Credit control saves time

Have a systemised approach and processes for credit management will, almost certainly save time compared with an ad hoc approach to credit control.

Ensuring your credit control is consistent and systemised (i.e. your accounting software could send out payment reminders automatically) will ensure your customers are chased regularly.

Credit control saves money

Limiting the amount of time you spend personally chasing payments and catching-up on admin will save you money. If customers know youll chase them if they are late paying they will hopefully be more likely to pay on time in the future. Payment on time will increase cash flow and ensure you dont incur late payment fees due to a lack of money in the business also.

Credit management improves cash flow

A good credit control process will ensure you get paid quicker, can pay your own suppliers on time, avoid late payment and ensure you maintain a positive cash flow in your business.

Credit control helps you manage risk and avoid business failure

The more customers you have, the more your exposed to credit risk. By managing your credit control, you remain in control of managing and mitigating risk. By managing cashflow, chasing unpaid invoices and implementing a comprehensive credit control process means youll be able to better absorb losses or bad debts and have less risk of your business failing.

Good credit management gives you peace of mind

There is nothing worse than worrying about money in your business, unpaid invoices, cashflow and your customers not paying you on time. By putting in place sensible, proactive and consistent credit control procedures, you will hopefully have less to worry about as you know youre on top of your admin and are doing everything you can to keep your business cash flow healthy.

Good credit control avoids you having to borrow money

Having good cash flow means you wont be reliant on short-term credit such as credit cards or loans that may attract high interest rates.

Avoiding cash flow problems

Overdue payments are one of the biggest reasons that businesses suffer cash flow problems. Implementing effective credit control helps mitigate some of this risk, helping you to avoid late payments or non-payment and will help you to keep your cash flow healthy and will enable you to make longer term investment decisions to grow your business.

How to chase outstanding debts

• You could chase the debt yourself, through written or email reminders or simply picking up the phone and talking to the customer. But this can be time consuming. Make sure that the first reminder is friendly as you dont want to jeopairdise a customer relationship.
• Use your accounting software - todays accounting packages have the ability to chase outstanding invoices automatically on a set date. However, be cautious, in order to use this, you need to ensure your accounting software is linked directly to your business bank account and that payments are matched and tracked to invoices. Otherwise, you risk chasing something that has been paid and causing bad feeling between you and the customer.
• Outsource your credit control process - there are many providers that will supply you with outsourced credit control services. This could provide a high quality, cost effective solution to credit control issues, if you dont have time or dont want to manage the process yourself. Factor in this cost when you are quoting or pricing your services or product. Outsourcing will give you access to professional Credit Controllers who will know the right approach to take and ensure its chased regularly.
• Invoice factoring or invoice financing - this is where you effectively "sell" some or all of your companys outstanding invoices to a third party as a way of improving your cash flow. The factoring company will pay you most of the invoiced amount immediately, then collect payment directly from your customers. This can be an effective way of managing large debts but there are advantages and disadvantages to invoice factoring ton consider.
• Take legal action - This should be your final approach if all other approaches fail with your customer. You should aim to resolve any debt issues before they reach the courts wherever possible. Taking legal action may depend on the size of the debt as it can often be an expensive option to take. However, for larger outstanding debts you should see this as necessary to maintan the health of your cash flow and it necessary as part of running a business.

Achieving effective credit control

1. Regularly check your sales ledger

You or your credit controller should understand your sales ledger thoroughly. You should be checking your sales ledger weekly and have a clear view of upcoming and outstanding payments so you can address issues as soon as possible.

2. Check customers credit scores

Before you take on a new customer you should undertake a credit check on them. This should show you their typical payment behaviour, understand if they regularly pay invoices late and if they may be a risk to your business.

3. Set clear terms

Be clear on your terms, your payment timescales, charges and action for late payment or discounts offered for early payment and reiterate this constantly to customers on invoices and when emailing the invoices to your customer.

4. Have a clear and consistent process for chasing payment

An effective credit control process will have someone responsible for chasing payment and a system in place to check the sales ledger, follow up on late payers and escalate any long-term issues via an agreed process.

5. Communicate and build honest relationships with your customers

Having honest conversations with your customers about payment expectations and maintaining good relationships can be the difference between being paid and not being paid. A good relationship also makes chasing any overdue invoices much easier.

Summary

Getting paid on time and chasing overdue invoices is much easier if you set expectations in advance. Having clear processes for collecting payments, credit scoring potential customers, good communication and strong customer relationships all help your credit control.

If youre struggling with credit control and need help and advice, then contact us today, call us on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.