Been in business a while? Or just starting out with your freshly minted start-up? We’re betting you’ve heard the words credit control being bandied about, but if you’re not sure exactly what it means or why it’s crucial to your business success, read on.
What is the meaning of credit control?
Credit control is an important business strategy or system used by businesses to increase sales volumes through extending credit to customers ahead of fulfilling the goods or services they’ve ordered. It means that your customers can place orders with you without the burden of paying until after those goods or services have been received. Depending on your payment terms, the credit worthiness of your customer, or their strategic value to you, payment might not be due for seven, 30 or even 60 days after receipt of your invoice.
The objectives of credit control
Aside from the strategic goal of credit control to increase sales volumes, the control part of extending that credit is really about risk management. The extension of credit is a strategic lever you pull to grow your business, but the control part is crucial to staying afloat. Cash is king after all.
It could be assessing a new customer you’ve just started onboarding, or it might be one of your oldest customers who you’ve noticed is starting to pay you later and later. Credit control is all about debt recovery, as promptly as possible. No business wants to be dealing with late payments, bad debts or debt collection. Good credit control helps you avoid this through setting credit limits, credit terms and running credit checks as part of a standard customer onboarding process.
Down the track, once the invoice has been sent, credit control covers the collection process, managing tasks such as follow-up reminders, making phone calls to chase overdue invoices and escalating to a debt collection agency for situations where payment is clearly not coming. This is all done while trying to maintain strong customer relationships.
Why is credit control important?
As a business strategy, credit control is important as it recognises the cyclical and sometimes seasonal nature of business cashflow. For example, if it is late in the month, a business might delay ordering goods if payment is required upfront so as not to accrue even more interest if it is borrowing funds to pay for those goods. Customers (new ones in particular) are also less likely to complete a purchase if payment is required upfront when the goods or services aren’t immediately delivered or are intended for future use.
In terms of running a successful business and having strong cashflow, the importance of credit control can’t be understated. Done well, it will ensure that you’re only extending credit to customers who are most likely to complete payment as per your agreed terms, or to those who are of clear strategic value to your business, so a desirable customer to have on your books.
Poor credit control can have dire consequences. Worst case scenario, if credit is continually extended to multiple late-paying customers who do not have the means to pay, you can be left without cash to pay your own staff, suppliers and invoices.
What does effective credit control look like?
Effective credit control runs like a well-oiled machine. It should seem effortless to all those involved. It’s pretty easy to spot the good from the bad (hint: whoever is running it won’t be tearing their hair out). Here are the key factors to look for when assessing the strength of a credit control system:
- A clear process: this is key. If you don’t have a clear credit control system, everything is going to be more time-consuming. You’ll waste time on repetitive manual tasks, it’s more likely that debtors will be missed and the experience for both staff and customers will be sub par.
- Smart use of tech: specialist credit control software and credit control automation are no brainers. It saves you time, helps you embed a robust credit control process and generally makes life easier for you and your customers. A massive benefit of automated credit control for small businesses (SMEs) is that no matter what size the invoice, your automation software will ensure it is followed-up.
- Decision-making is built into the system: If meetings must be held every time a debtor should be moved into a new phase of your follow-up workflow, you’re wasting time and creating the potential for a debtor to be forgotten. A strong credit control policy removes the decision making from the individual and builds agreed credit control procedures into the system. So, when a debtor reaches the end of one follow-up phase, they automatically get pushed through to the next.
- Clear accountability: Whoever is involved in your credit control must know exactly what steps and responsibilities they’re accountable for. Without accountability, too much time can be wasted on working out who’s doing what or result in miscommunication and dropping the ball.
- Set KPIs: If you’re wanting to get ahead, knowing what success looks like is important. Being able to benchmark your credit control performance against expected results and knowing what target metrics such as debtor days and 90+ days overdue are, is key to driving improved performance and better cashflow.
Where to find out more about credit control
A great place to start learning more about credit control, best practice, and if needed, training for your staff, is the Australian Institute of Credit Management. As the industry body for credit controllers and credit management professional across Australia, they are key advocates for credit management professionals and the important work they do for businesses.
Struggling with your credit control?
If the thought of your debtors list gives you the shivers, chat to one of our credit experts to learn more about CreditorWatch Collect. From automating your repetitive manual tasks through to outsourced credit control specialists, we can help get your cashflow humming and keep those debtors under control.
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