accounts receivable Cash Flow Cash management Credit control Credit Management debtor management Late payments
6 mins read

Credit control policy and procedures

WHAT IS CREDIT CONTROL?  

Credit control is the process of getting payment from customers that you’ve extended credit to. Extending credit is a common and necessary business practice. It can help widen your customer base and build stronger customer relationships by allowing customers to order and receive goods or services without paying in advance. The drawback is that without solid credit control policy and procedures, your business may suffer from late payments and poor cashflow. The key goal of credit control is ensuring your customers pay you in full, as promptly as possible.  

WHAT IS CREDIT CONTROL POLICY?  

Credit control policy and procedures are the steps you’ve put in place and the credit terms you’ve agreed with your customers to ensure you get paid promptly. Depending on the size of your business, you might have a dedicated credit controller who leads the creation of and adherence to credit policies. Credit control policies and processes set your business’ expectations on key rules such as credit applications, credit limits, payment terms, payment methods, late payments, debt collection and bad debt. In terms of small business policies and procedures, credit control and credit management are crucial to long-term resilience and success.  

WHY IS CREDIT CONTROL IMPORTANT?  

Any business that is producing more than around 25 invoices each month will run into administrative issues without clear credit policies and processes. If you’re only invoicing a few customers each month, you might have the time to manage the delivery, follow-up and reconciliation of these ad hoc. If you’ve grown past this level, then chances are that late paying customers are starting to build up and doing everything ad hoc is impacting on your productivity and cashflow.

Effective credit control and debt collection policy helps businesses:  

  • Get paid faster.  
  • Protect themselves from risky customers.  
  • Have better customer relationships.  
  • Waste less time making credit decisions.  
  • Reduce their total amount overdue.  
  • Improve internal accountability.  
  • Spend less money on debt collection.  
  • Write-off less bad debt.  

WHAT MAKES EFFECTIVE CREDIT CONTROL POLICY?  

An effective credit control policy will focus on key considerations from both a customer and business perspective.  

Customer:  

  • The credit application – covering aspects like a credit check or credit score and gathering all the relevant contact information to ensure you’re setting yourself up to be paid on time and accurately understand a customer’s creditworthiness.  
  • Credit limit – this should reflect several factors such as the strategic value of a customer, whether they’ve got credit history with you or whether this is their first time purchasing.  
  • Payment terms – these must be clear and cover your expectations for being paid and the methods of payment available.  
  • Collection of debt – this should set the tone so that customers understand you don’t take late payment lightly. Cover information on when you’ll escalate a debt, how any costs associated with debt collection will be covered.  

Business:  

  • Roles and responsibilities – who is responsible for what steps of the credit control process (obtaining customer contact information, sending invoices, sending reminder emails and SMS messages, making phone calls, escalating overdue accounts)  
  • Process for collecting payment – what does your workflow look like. What’s the timeframe between first sending an invoice and sending reminder messages for unpaid accounts?  
  • Escalation paths – who in the business authorises the escalation of unpaid invoices to legal action or debt collectors? Who is responsible for liaising with these external parties?  

CREDIT CONTROL MISTAKES TO AVOID  

Not having up to date customer information  

This is a simple but common mistake. Often sales reps or customers will focus on the contact details of those who are placing the order and will be the contact for repeat business. This is great. For sales. For the finance side of the business this can often be the first step on the path to late payment. To ensure this doesn’t become a problem for you, obtain the contact information for the person responsible for paying invoices, not just the person leading or approving the purchase. Clearly record these contact details in your accounting software.  

Not having proof of customer’s acceptance of credit and payment terms  

Make sure you can prove quote acceptance and that as part of the quoting process customers sign your terms of trade. If things do go sour down the track, having proof that your customer has accepted both the quote and credit and payment terms can be important.  

Not invoicing in a timely manner  

Haven’t sent your invoice? Then don’t expect payment. If you don’t send an invoice as soon the job or goods have been fulfilled, then you’re setting yourself up for late payment pain. The best time to send your invoices is as soon as the job is complete. Set the tone in terms of your expectations. Fulfil your customer’s order in a timely manner. Invoice them promptly. Expect payment promptly.  

Making it hard to pay you  

Are your invoices clear? Can the person responsible for paying the invoice (bearing in mind they might not have had anything else to do with the order) understand it clearly – what the invoice is for, who needs to be paid, how much is due, the due date and how to make payment. Confusion due to lack of information on invoices is a barrier to prompt payment. Reviewing your invoices and how information is presented on them is a great place to start if you’re experiencing late payments.  

Avoiding phone calls  

Confrontation and difficult conversations can be awkward. Many people who aren’t trained in credit control or accounts receivable shy away from phone calls when chasing customers for payment. It is perfectly understandable, but this is yet another contributor to delayed payment. It’s easier for customers to ignore you or lie when it comes to an overdue account if communication is only via digital channels. When the company you owe money to is on the other end of the phone and it’s a real person talking to you, it’s hard not to agree to a payment plan or truthfully explain your financial situation.  

Being too scared to escalate bad debt  

This is the pointy end of late payments. If you’ve ticked off all the follow-up steps agreed in your credit control procedures, but payment is yet to be made, it’s time to escalate the debt. This doesn’t mean you have to go straight to a debt collection agency; the first step can often be sending a letter of demand. A formal, legal step like this is often enough to raise the eyebrows of a debtor and get their payment through. Remember, unless there are exceptional circumstances which the customer has discussed with you, if you’re at this point it’s highly likely you don’t want any future business from them so now is the time to prioritise getting paid over your customer relationship.  

GETTING HELP WITH CREDIT CONTROL  

Sometimes, the best way to get ahead in business is to recognise what you excel in and what you might want to get outside support for. If your credit control isn’t under control or it’s just not what you want to focus on, there are a few different avenues to explore.  

Outsourced credit controller:  

Outsourced credit control is ideal for small businesses who can no longer manage their debtors well but aren’t yet large enough to justify employing a permanent, inhouse credit controller or credit control team. Bookkeepers are a great place to start for this sort of support.  

Automated collections software:  

Want to keep things in-house? Or perhaps you already know that it really is your credit control process (or lack thereof) that’s at the root of your problems. If this is the case, then integrating an automated collections tool could be an efficient and cost-effective solution. CreditorWatch Collect integrates instantly with popular accounting systems like Xero, MYOB and Quickbooks. It’s easy to use and you can be automating your reminders within just a couple of hours. 

accounts receivables cashflow credit control credit management
Lucy
Product Marketing Manager
Lucy joined the CreditorWatch marketing team in October 2022. With experience across government, media and SMEs she loves working with companies like CreditorWatch that enable businesses large and small to improve their processes and work smarter.
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