What Does the Term “Credit Control” Mean in Accounting
At some point, every business owner has to deal with late-paying clients. It’s unpleasant, aggravating, and, unfortunately, a rather common condition. Credit control comes into play in this situation.
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What is credit control and how does it work?
Credit Control is a business’s strategy for ensuring that it only extends credit to customers who are able to pay and that they pay on time. It is an important component of a well-managed organisation that will help you reduce bad debts and boost cash flow. Improving your debtor book management can help your company save money by reducing the need to pay interest on overdrafts, issue discounts, or employ pricey invoice discounting. Having cash to make payments on schedule will improve your own credit terms with suppliers. In other words, keeping track of your debtors can help you keep all of your juggling balls in the air.
It does, however, necessitate specialised talents as well as the proper procedures and processes in place at the company. Credit control is more than just collecting money from late-paying clients; it’s also about forming relationships with them and establishing a rapport with them. Calling a client to chase money may be a difficult conversation, and if you’re not careful, you could easily upset them, so always be nice and professional, and keep the emotional side of things out of the chat.
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Credit management also include determining how much credit (if any) you are comfortable offering to potential customers from the start, before the sale is ever made. If you do business with consumers for a long time, you should maintain your credit ratings updated and be on the lookout for indicators of financial difficulty so you can alter credit limits and avoid being caught off guard if a customer goes bankrupt and owes you money.
When it comes to billing, knowing your customer’s processes and approval systems is also beneficial. It’s difficult enough to get paid on time without finding out 35 days later that your invoice is incorrect and needs to be re-submitted. With most corporations only running one payment run per month these days, your company may have to wait more than 60 days for payment – can your company afford to wait that long?
Don’t give customers the chance to pay you late; instead, make sure your invoice is up to date and meets all legal criteria. Customers won’t tell you if there’s an issue with your invoice; instead, it’ll end up in their disputed pile, so it’s critical to get it right the first time. If you’re sending an invoice to a new customer, it’s good calling them a few days after you’ve sent it to double-check that it’s been received.
What is the significance of credit control?
Your company’s cash flow could suffer if you don’t have a good credit management system in place. If you get it correctly, you’ll have a smooth operation where clients pay on time and your cash flow is secure. Understanding your finances is vital for identifying new ideas and areas for growth, in addition to keeping your business running.
Failure to utilise credit control procedures could jeopardise your company’s financial health, lowering your credit score and blocking access to crucial financing or client opportunities.
It can be difficult to pay suppliers, overheads, and, in some cases, employee wages when weak credit control practises lead to cash flow concerns. Extending substantial credit limits to consumers that fail to fulfil payment deadlines on a regular basis might put a company’s survival in jeopardy, even resulting in insolvency.
How can I maintain track of my credit control?
It’s entirely up to you how you keep track of your invoices. Credit control, on the other hand, can be time-consuming, especially if you have a large number of clients. Some people like to utilise a spreadsheet, but you may save time and effort by automating the process with bookkeeping software.
What’s critical with either way is that you keep track of each payment follow-up, not simply the invoice that was sent out. As a result, keep track of your actions in a spreadsheet or have your software log them as an audit trail.
It implies you’ll be able to notice patterns of clients who are late paying their bills on a regular basis. It could be something you decide to pursue further, such as requiring payment in advance.
Customers have most likely forgotten or misplaced your invoices, and all it takes is a simple reminder. Be on the lookout for those you’ll have to pursue down multiple times!
Is it possible to get bills paid more quickly?
It can be beneficial to send reminders about outstanding invoices before they become past due. You’ll be more likely to get paid on time (which will help you pay your own bills on schedule) and in a more customer-service-friendly manner.
Users of bookkeeping software can set up automatic email reminders for clients at any interval. You may, for example, send one a week before it’s due, and then send late payment ones after the due date has gone.
In most circumstances, this will suffice to get them to pay their invoices, however you may need to follow up with them personally in other cases. Automated reminders, on the other hand, are a terrific way to save time for individuals who simply forget to pay.
Making it easier for clients to pay directly from your invoices is another approach you may use.
Managing non-paying customers
Even with the most comprehensive credit management mechanisms in place, some customers will fail to pay on time or at all. Problem payers are difficult to manage, but having a system in place to track down outstanding bills is critical – experienced credit controllers are masters at this, so consider hiring one as your company grows.
When putting in place a debt collection system, you must agree on terms like:
- When a payment deadline has gone, how soon should you begin chasing?
- Which debts will you pursue first if you have a lot of them?
- When do you think you’ll resort to legal action or hire a debt collection agency?
Start the process informally with a series of phone calls or emails after you’ve agreed on a date to start chasing down your owing bills. Explain why the money is due and when you might expect to receive it. In your response, provide as much information as possible. For example, a customer is likely to agree to investigate the situation and contact you. If that’s the case, choose a time and date for when you’ll talk about it again. If a consumer claims that a cheque has been mailed, ask for the cheque number or the date it was mailed to verify its legitimacy. During these conversations, always retain a written record of each conversation.
If the invoice is not paid after several attempts, you will need to take additional steps to avoid cash flow concerns.
Maintain a professional tone in your correspondence and, more importantly, postpone delivery of any more items or services until the outstanding invoice is paid.
Options for debt collection
There are two alternatives for dealing with customer debts that have become unmanageable. You can choose your own threshold, but if a debt is more than 30 days past due and the client isn’t responding to correspondence, it’s time to start debt collection.
- Legal action
If you decide to pursue legal action, you can hire a lawyer or do it yourself.
A professional firm will begin by sending a claim letter, which will initiate legal action. This usually includes any supporting documentation, such as communications records, as well as information about the debt you’re attempting to collect. It’s also a good idea to specify a deadline for a response or payment.
This may be sufficient to resolve the problem, and you may be paid. If this is not the case, your lawyer will begin to establish your case.
Going through this process without the help of a professional solicitor can be time-consuming, and there’s a chance you’ll make a mistake, but it’s still a viable alternative for many firms.
- Debt collection
Transferring the debt to a debt collection agency relieves the pressure of a business debt by allowing a professional to recover funds more quickly, however there will be a cost. Because their behaviours reflect on your firm, it goes without saying that they should be trustworthy.
Look for a company that is a member of the Credit Services Association and is registered with the Financial Conduct Authority (FCA). A professional debt collection service will adhere to all industry regulations and will maintain a positive relationship with your consumer rather than intimidating them.
Making a court action and retaining legal counsel to collect money due to the company should be the absolute last choice. It should, in the end, result in you receiving what you are owed, but it will almost surely result in you losing the customer in the long term. It’s improbable that you’ll ever form another professional relationship. All parties should recognise the benefits if you can achieve a satisfactory resolution before this point.
Credit control is a difficult task that demands organisation, perseverance, professionalism, and comprehension. However, by putting in place procedures and executing them step by step, you may reduce risk and financial losses, enhance cash flow, and therefore ensure the success and smooth operation of your firm.
Good credit control management necessitates preparation, organisation, and a zealous adherence to procedures. While discussing your clients’ ability to pay can be a delicate subject, credit control is a common procedure that should comfort them that your organisation is trustworthy and performs due diligence.