Credit Control - Expectations v RealityBack
The ultimate goal of credit control is making sure that the money owed to you gets paid in full and on time. The day to day duties revolve around making sure that your administrative functions which assist in successful credit control are performed daily but, from time to time, you may need to chase up individuals and companies who owe you money for your goods and/or services. Credit control is a critical part of any successful business as it ensures credit only goes to individuals who are able and likely to pay the money back, ensuring a smooth cash flow into the business.
There are positives and negatives about acting in the role of credit controller but, by managing expectations, anyone can successfully perform this vital function.
Here we examine some common preconceptions about this important duty and how they marry up with the reality you may face in practice.
Expectation 1: You Will Always Be Paid On Time
In an ideal world, customers would only get credit that they can afford and pay it back in full and on time. However, life gets in the way of this from time to time and sometimes this does not happen. However, by applying successful credit control principles, you can predict these problems and put contingency plans into place to prevent it causing an issue.
Customers may miss payments or pay late but there still are ways for you to manage this. Set up a sales ledger and keep it up to date so that you can see which payments need to be made and when you think you will likely receive the funds based upon your communications with that. This way you can see if there is a chance that an invoice or set of invoices to a particular customer may breach the due date.
It can also be useful to encourage early payments by offering a small discount. A shorter time period in which a customer can pay back the credit means that circumstances outside of theirs and your control are less likely to happen. It is best to receive slightly less profit than to lose a lot of profit if the customer fails to pay it back at all.
Expectation 2: Credit Control Will Be Easy
You need to keep an eye on every single customer and on every single transaction to ensure that each client is keeping to their credit agreement. This means a lot of work and a lot of balls for you and your team to juggle in the air at any one time.
The best way to avoid dropping the ball on your credit control procedures is to ensure that the procedure is watertight to begin with. Set out a strict list of rules that everyone needs to stick with and a numbered list of steps covering every eventuality. This means that no matter what happens, you are covered and know what to do. Ideally, a company should have a dedicated credit controller or outsource to a credit control agency rather than having this as an addition to someone else’s job.
Expectation 3: There’s No Need to Be The Bad Guy
As much as it pains us to say this - you can’t expect clients to make payments all the time and without fail. And sometimes imposing penalties is a stick you will have to wield to encourage those who fail to pay. There will always be some clients who just try to get away with not making payments if they don’t feel that there is any serious fallout from this behaviour.
Make sure that your credit control procedures include punitive measures that will discourage clients from making late payments or missing payments. A simple measure such as putting a client on a stop list as soon as they miss a payment can be useful. If they are paying for a service and are no longer able to use this service if they don’t make a payment, they should be more likely to ensure that they always pay in time.
It is also worth adding interest on late payments as this should deter clients who consistently miss payments.
Expectation 4: Customers Wouldn’t Lie to You
It is your job in credit control to become good at recognising when a customer is being honest and when they are simply trying to get out of making a payment. Sometimes situations will be one-offs and outside of a customer’s control and, in this case, you want to be lenient and helpful in order to retain that customer’s good opinion of the business. However, be too lenient and they may walk all over you.
Past behaviour of a customer is always a good way to ascertain whether this is a habit or a one-off and working with people a lot should help you to gauge honesty. You could always ask for more details (for example if they say the cheque is in the post, ask for the cheque number and recorded delivery details).
Finally, give and follow through on warnings. Even if you think a customer is being honest, an agreement needs to be reached between you and kept to from that point on.
Expectation 5: You Are in Control
Sometimes life gets in the way and a customer will have a genuine reason why they cannot make these payments at this time. In that case, there is really not much you can do other than wait and stay in communication so that the debt is not forgotten when they are in a position to pay again. Bear in mind that, if you push a customer too much, they may make payments that they can’t afford leading to further financial problems. If a customer bankrupts themselves then the debt will be written off anyway and the company will lose money.
You can protect yourself from situations outside of yours of your customers’ control by performing regular credit checks and getting to know customers so that you can be sure that you aren’t lending more than the customer can pay back.
For business clients, it is useful to keep up to date with industry information so that you know which businesses might be struggling or coming up to a difficult financial time before it causes issues.
For products and services, there is no harm in taking full or partial payment upfront from those that can afford it. Minimising the amount borrowed and how long it will take to pay back makes it less likely that they won’t be able to afford it later on.
TFMC – credit control
We’re always here to help here at the Financial Management Centre and we have particular experience in helping our clients devise time-efficient and cost-effective credit control procedures. Please call us today on 0800 470 4820 or email firstname.lastname@example.org.