The Best practices of Credit Control

Credit control is a system businesses use as well as central banks to ensure that credit is given only to borrowers who will be able to repay it. It is a financial control that is employed by businesses, especially in manufacturing to make sure that once sales are made, they are realized as cash or liquid resources.

In small companies, credit control can be the responsibility of just one person. In larger companies, the department might have sub-sections. In order for businesses to succeed, they have to ensure that their customers pay them.  Should invoice payments come in very late or in worse cases, at all, the business of the company can soon become illiquid.

Cash flow is the spine of any business. This is why every business must evaluate whether it is doing everything that it can to ensure that its customers are paying on time. Nevertheless, the recovery of debt can be very frustrating and most times, unsuccessful. Therefore it is always in a business’s best interest that proper procedures which enable early identification of potential risks. The secret to getting paid on time is having an effective credit management policy.  Below are some of the best credit control practices that companies can implement across their departments:

•     Establish Credit Limits with Sign off- this is another principle businesses should establish. It means that organizations or businesses should have a certain amount level that a particular position or committee can approve. Having sign-off levels established helps to make sure of proper risk management through multiple inputs through the organization.

•    Develop a Risk Rating programmed: this is a must for any business or organization that is looking to make a world-class credit department. The RRS will help to prioritize departmental focus, categorize outstanding A/R by risk rating levels, and build a better data set for reviewing, sorting as well as decision making. Using the RRS rating, a business will be able to tell and differentiate between customers who are in top financial conditions with low debt percentage to people with very good character to customers with low payment history. Using this risk rating, you can also tell people with a fair credit history or accounts. The risk rating programmed ensures you are one step ahead of your customers and you protect yourself from giving services or loans to people who will hurt your business.

•   Obtain Buy-In Across the Organization: Obtaining ‘buy-in across the organization is of prime importance for a credit department. Rather than using the “it’s my way or the highway” approach to decision making, ensure to explain and outline any decision and its effect on the stakeholders involved in the decision. Doing this helps to build trust and better achieves the needed ‘buying throughout the organization.

•    Be willing to walk away from bad money: customers are not created equal. Some customers will not possess the ability or character to pay dues when due. Both credit and sales need to be willing and able to walk away from an open credit relationship in this situation.

•    Develop a keen business sense and Trust your instincts: Pay attention to trends that will affect not only your company’s immediate customer base but also macro trends that will eventually trickle down into those customers you are selling products to. Are interest rates rising resulting in your customer carrying lots of debts? The stock market, is it on the decline? Having this information will help you make more informed decisions.

By taking and using these credit control practices, and a mind-set that seeks to develop alliances across the organization and customer base, credit professionals can positively impact the environment in which they serve.