Controlling Credit Effectively and What to Do When it is Not
Opening Statement: Credit 'Control' means controlling credit.
When debtors are not controlled, cash flow is jeopardized.
What it is: Credit Control is based on the Credit Policy to manage it effectively in the Receive, Record, Maintain, and most importantly, CONTROL.
Effective credit control involves the following elements: a) System b) Procedure c) Staff The Credit Cycle 1.
Credit Application from New Customer 2.
Due Diligence to check credit worthiness.
Documents required: Bank/Trade/Credit Reference.
3.
Credit Approval of Customer - set Credit Limit and Terms & Conditions 4.
Raise & Deliver Welcome Letter with Terms & Conditions 5.
Goods Delivered/Service Provided 6.
Invoice Raised, Sent to Customer 7.
Invoice Paid, Collect from Customer 8.
Next Order Received 9.
Credit Approval - at each stage, necessary to prevent over limit and monitor overdue 10.
Invoice Raised, Sent to Customer 11.
Monthly Statement, Sent to Customer 12.
Follow up with Customer BEFORE due date 13.
Invoice Paid, Collect from Customer 14.
Continue 8 - 13.
Although careful monitoring of the processes in 8 -13 are crucial, it is equally important during the Credit Application as the Customer must be found credit-worthy.
The above system is simple and it is proven workable from my experience.
Some people may even implement tracking by referring to each of the steps individually which allows them to know exactly at which stage of the sale is - not knowing or, having that knowledge kept to a select few in the Company makes the system less effective.
Assign staff to each stage to ensure that the procedures within that stage are properly managed.
Credit Procedure Procedures within each stage requires a specific and detailed 'step by step' elaboration of how it is done so that even the uninitiated understands.
By implementing the Credit Procedure steps systematically and consistently lessens the possibility of being faced with late payment and bad debt.
It also tells the Customer that we are knowledgeable and serious about the business.
Irregularities What happens when late payment and bad debt occurs? Cash flow is obviously affected and the Company may no longer be able to sustain its operations; especially when the problem is addressed way too late.
This is why having several credit contingency plans ready for implementation is important: 1.
Cut back on credit given 2.
Focus on cash sales 3.
Increase efforts in collection and manage it with a Collection Projection Plan.
4.
Utilize Company FDs.
The rule of thumb is to have at least one month's overheads for each year of operation kept aside for contingency.
5.
Utilize acquired Corporate Financing Facilities includes factoring.
Such funding must be obtained early and ready for use months prior in advance.
6.
Capital injection as a last resort.
Shareholders increase the amount of investment.
Even when the above plans are implemented, the possibility of the Company being forced to suspend trading or liquidated still exists.
When this happens, it is no longer capable to trade normally and the Company should inform its Suppliers, Partners, Customers, and Staff at least a month before its funding capacity vanishes.
Being honest and direct on the matter leaves less room for negative speculation.
However, the message communicated to each party although bearing the same objective may be slightly different.
The same people will appreciate knowing early.
The Collection Projection Plan is a schedule of expected payment to be received and is used in conjunction with past historical data of sales for that period and expenditure to determine the balance of payment.
Collection must equal a surplus against expected sales and expenditure before a decision to resume normal trading is made.
Expenditure includes accumulated credit owed to others for services necessary in turn for our trade.
When debtors are not controlled, cash flow is jeopardized.
What it is: Credit Control is based on the Credit Policy to manage it effectively in the Receive, Record, Maintain, and most importantly, CONTROL.
Effective credit control involves the following elements: a) System b) Procedure c) Staff The Credit Cycle 1.
Credit Application from New Customer 2.
Due Diligence to check credit worthiness.
Documents required: Bank/Trade/Credit Reference.
3.
Credit Approval of Customer - set Credit Limit and Terms & Conditions 4.
Raise & Deliver Welcome Letter with Terms & Conditions 5.
Goods Delivered/Service Provided 6.
Invoice Raised, Sent to Customer 7.
Invoice Paid, Collect from Customer 8.
Next Order Received 9.
Credit Approval - at each stage, necessary to prevent over limit and monitor overdue 10.
Invoice Raised, Sent to Customer 11.
Monthly Statement, Sent to Customer 12.
Follow up with Customer BEFORE due date 13.
Invoice Paid, Collect from Customer 14.
Continue 8 - 13.
Although careful monitoring of the processes in 8 -13 are crucial, it is equally important during the Credit Application as the Customer must be found credit-worthy.
The above system is simple and it is proven workable from my experience.
Some people may even implement tracking by referring to each of the steps individually which allows them to know exactly at which stage of the sale is - not knowing or, having that knowledge kept to a select few in the Company makes the system less effective.
Assign staff to each stage to ensure that the procedures within that stage are properly managed.
Credit Procedure Procedures within each stage requires a specific and detailed 'step by step' elaboration of how it is done so that even the uninitiated understands.
By implementing the Credit Procedure steps systematically and consistently lessens the possibility of being faced with late payment and bad debt.
It also tells the Customer that we are knowledgeable and serious about the business.
Irregularities What happens when late payment and bad debt occurs? Cash flow is obviously affected and the Company may no longer be able to sustain its operations; especially when the problem is addressed way too late.
This is why having several credit contingency plans ready for implementation is important: 1.
Cut back on credit given 2.
Focus on cash sales 3.
Increase efforts in collection and manage it with a Collection Projection Plan.
4.
Utilize Company FDs.
The rule of thumb is to have at least one month's overheads for each year of operation kept aside for contingency.
5.
Utilize acquired Corporate Financing Facilities includes factoring.
Such funding must be obtained early and ready for use months prior in advance.
6.
Capital injection as a last resort.
Shareholders increase the amount of investment.
Even when the above plans are implemented, the possibility of the Company being forced to suspend trading or liquidated still exists.
When this happens, it is no longer capable to trade normally and the Company should inform its Suppliers, Partners, Customers, and Staff at least a month before its funding capacity vanishes.
Being honest and direct on the matter leaves less room for negative speculation.
However, the message communicated to each party although bearing the same objective may be slightly different.
The same people will appreciate knowing early.
The Collection Projection Plan is a schedule of expected payment to be received and is used in conjunction with past historical data of sales for that period and expenditure to determine the balance of payment.
Collection must equal a surplus against expected sales and expenditure before a decision to resume normal trading is made.
Expenditure includes accumulated credit owed to others for services necessary in turn for our trade.
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