Let’s start off with why you need Credit Control.

In the world of business maintaining a healthy cash flow is essential for success. In many small-to-medium sized businesses aged receivables make up a large proportion of their working assets. That is why minimising the total outstanding debt, by ensuring timely and dependable payment from clients, is one of the quickest and most effective ways to tackle issues with cashflow. This is where introducing a reliable and consistent credit control policy comes into play – It’s your ticket to maintaining a healthy cash flow, managing credit risk, and fostering strong client relationships.

But, before we dive into the specifics of what your credit control policy should look like it is important to understand what it is.

Credit control encompasses the processes put in place to ensure the business is paid for the products and services it provides. The aim is to minimise the time you spend waiting for payments while keeping your client relationships in good shape. It involves evaluating credit risk, setting credit limits, establishing payment terms and monitoring accounts receivable.

So, what should your Credit Control policy contain?

Below I’ve detailed the key components to think about when creating your company’s credit control policy.

1. Credit Assessment

Before you decide to extend credit to a client you should assess their creditworthiness. Clients with a better credit score are more likely to pay on time and consistently. Your policy should spell out the specific checks that should be performed, such as credit checks and reference requests. Consider what’s necessary and acceptable based on the level of credit being requested or offered.

2. Clear Credit Terms

Your policy should clearly define the payment terms agreed with your client, including payment dates and credit limits, as well as any additional clauses, such as early payment discounts or late payment fees. Your policy should also outline who in the organisation is responsible for proposing, agreeing to and altering payment terms, creating a clear process and chain of authorisation.

It is also essential to review these payment terms regularly to determine if existing credit limits need to be revised. For example, if a client is consistently failing to meet the terms of the agreement, it may be necessary to reduce the credit limit, shorten the payment period or remove their credit facility altogether.

3. Invoicing procedure

Mistakes in invoicing can lead to lengthy payment delays and difficulties in tracking accounts receivables. Therefore detailing how you format your invoices, the information required on your invoices and how frequently invoices are sent out in your credit control policy can help minimise errors and encourage prompt payment, making it critical for effective credit control.

4. Credit Monitoring and Collections

Having a well-defined process for monitoring customer accounts and chasing outstanding payments is key. Your policy should outline how you’ll monitor customer accounts to ensure adherence to the agreed terms and highlight the step-by-step process for chasing overdue debts and escalating collection efforts if delayed payment continues.

Consider using automated software to handle the initial chasing process. It not only saves time but also ensures consistent follow-up.

Read our blog Should I use Chaser or Xero to chase unpaid Sales invoices? for some of our suggestions.

Another detail you may wish to include is a process and scripts for dealing with common invoice queries and disputes so that they can be handled quickly and won’t cause payment delays.

5. Reporting and Analysis

Lastly, think about how you are going to review and analyse the effectiveness of your credit control procedures. Regular analysis of your aged receivables and adjusting your policy when you notice room for improvement will further enhance the efficiency of your credit control.

In Conclusion

Having an established and effective credit control policy goes beyond simply managing cash flow; It serves as a safeguard for your business’s financial health and plays a pivotal role in nurturing trust with your clients. However you choose to structure and manage your credit control, it should be tailored to what works for you and your business, enabling you to make the most of your time and resources.

We work with business owners and their finance teams to design credit control policies and processes that help minimise the impact of late payments and keep you in control of your cash flow. Get in touch for more info!