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Credit Management – How to Get it Right Every Time 

overdue invoice

One of the most important aspects of running a successful business for many companies is effective credit management. Your business's cash flow can be severely impacted if money does not come in on time, and the resulting problems can quickly spiral out of control.

Effective credit management is an important process that begins with getting to know your customers before selling to them and ends only when you’ve been paid. Here we are going to take a step-by-step look at credit management best practices to help you ensure you get paid on time, every time.

Before the Sale Credit Management Best Practices

Credit checks on potential customers are a must, as are strict credit management procedures that your sales and credit management teams understand and adhere to.

The Importance of Setting a Credit Management Policy

Your accounts receivables team should implement a coordinated and professional credit management procedure by clearly laying out a day-by-day strategy from the time the order is placed until the invoice is paid. From there make sure that the appropriate levels of training are provided so that all stages are properly completed, communicated, and adhered to. No special favours to certain people, no ‘we’ll let it slide this time’, or everything will fall apart.

Get to Know Your Customer’s Payment Profile

Before committing to credit terms, it’s becoming increasingly important to get to know your customer. The first step is to collect all the necessary business data by having new customers complete an application form.

Using this information, you can ask a credit expert to check the credit risk posed to your company using one of the many credit rating services available on the market. Banks do this before they issue business or consumer credit, and you should too.

Check Your Customer’s Terms

It’s critical to check for any onerous terms imposed by your customer that may override your company’s own Terms & Conditions of Sale. Before delivery, if at all possible, send out an order acknowledgment to reaffirm your terms.

To demonstrate your seriousness, use this opportunity to explain your credit management procedure in the event of late payment, such as charging interest, taking legal action, or referring the debt to a specialist commercial debt collection agency.

Keep a Stop List

It can often help to put persistently late-paying customers or those with a poor credit rating on a “stop list” or a “watch list” to ensure due diligence when selling to these companies in the future.

Businesses on the stop list should be notified and should not be supplied with any additional goods or services until at least all outstanding invoices have been paid, while those on the watch list should no longer be offered credit terms without an up-front payment or deposit.

Credit Management After the Sale

This is the most crucial stage of successful credit management, from timely invoicing to maintaining regular contact with your customers.

Send All Invoices in a Timely Manner

It may seem pretty obvious, but sending invoices to customers as soon as an order is fulfilled is critical, as any delays in invoicing will generally result in delays in receiving payment. The process can be sped up even further by faxing or emailing the invoice rather than mailing it.

It’s also crucial that the invoice is addressed to the correct person and that the information it contains is correct. Make sure to include purchase order numbers or vendor references whenever possible, as such things are great for both parties to reference later.

State Your Terms and Conditions Clearly and Firmly

Your invoices must be clear and easy to understand, with your credit terms, the actual payment date, and the acceptable payment methods and details prominently displayed. Make sure you don’t make the mistake of choosing fancy-looking invoices over easy-to-read and accurate ones.

Work on Positive Customer Relationships

Having a pleasant and positive relationship with your customers has a number of benefits. It will not only encourage them to buy more goods and services from your company, but it will also increase your chances of getting paid on time; the more they like you, the less likely they are to keep you waiting.

It’s always a good idea to call ahead of time to ensure that your invoice is in the system, avoid any disputes, and make sure that your payment is at the top of the payment queue.

Dealing with Difficult Beyond Terms Issues

Chasing customers for past-due payments can be difficult and uncomfortable, but you must act quickly and decisively to achieve the best results.

Review Your Sales Ledger Often

Knowing when an invoice exceeds its credit terms is a crucial aspect of credit management. Your accounts department or credit manager should review your sales ledger on a regular basis to ensure that your customers’ payment activity is always tracked. If your business has not grown that far yet, an outsourced accounting firm will add this crucial check to the list of the many things they can do for your company to keep it on the right financial path.

Begin the Chase Early

When an invoice exceeds its credit terms, the pressure is on to collect the debt in full, as the likelihood of collecting the debt in full decreases as the debt matures. As a result, it’s critical to speak with the person in charge of your invoice right away to find out why you haven’t been paid and when you should expect to be.

Don’t Be Afraid to Get Tough

Asking customers for money they owe you, despite the fact that it is rightfully yours, can be a daunting task – especially for those larger than you. It’s important to remember that by not paying on time, they’ve harmed your company’s cash flow and exploited the trust you put in them by offering credit terms. You have a right to go hard.

Ongoing Credit Management Best Practices

From benchmarking to insuring against bad debts, there are always things you can do behind the scenes to ensure your credit management process is as efficient as possible.

Keep an Eye on Collections Performance

Always examine your company’s credit management performance, determining whether the process can be made more efficient, whether the team is too big or too small, and how your credit terms compare to those of your competitors. The comparison of your average debtor days to the industry average is crucial to this process. You can keep your company on the front foot by reacting to the latest trends.

Insure Against Late Payments

Credit insurance safeguards a company’s cash flow from the effects of late payments and bad debts by protecting it from non-payment due to insolvency or prolonged default, and policies can be tailored to meet your specific needs.

Stay in Your Bank’s Good Books

Because late payments can cause serious cash flow problems for your company, it would be great to be able to turn to your bank for short-term funding to bridge the cash-flow gap. To stay in their good books, it’s crucial to keep in touch on a regular basis, attend all scheduled meetings, and let them know right away if you’re having any short-term cash flow issues.

Remember to Thank Your Good Paying Customers

Remember to send a thank you to all of your on-time paying customers! It not only shows you appreciate their punctuality, but it also improves customer relations and may lead to additional sales.

Get Credit Management Help

Given its importance to the success of your business – particularly for those with a large debtor book – credit management should be an everyday business task. As a result, hiring a full-time credit manager who spends all of their time keeping the business’s sales ledger up to date, building rapport with your customers’ accounts departments, and performing basic credit management tasks could be a serious plus. However, for many small businesses that level of onsite accounting staff is not something they are ready for just yet.

That does not have to be a problem though. K.K. Chartered Professional Accountants can help with your credit management issues and any and everything else related to your business accounts. Get in touch today and let’s chat about how we can help you.