One of the best ways to manage credit risk is through credit control. This process involves monitoring credit limit status and creditworthiness, as well as enforcing credit limits and other credit policies.
It also involves taking corrective actions against delinquent accounts and managing charge-offs.
If you want to improve your credit control processes, here are some steps that may help.
Credit control procedures widely fall into one of two camps, proactive or reactive, with a combination of the two usually producing the best results.
If you're not sure if your current procedures are proactive or reactive, don't worry, we'll be breaking it down for you and examining the best practice in either case.
Reactive credit control is where you respond to changing situations and look to find the best result from them. This often involves:
Just because a customer has started to have a shaky payment record, doesn't make them the enemy. You can't be sure what's happening in their life, so the best approach is to communicate.
One of the best ways to do this is by nominating an account manager who will handle credit control for them
By giving someone ownership of each customer credit profile you've made it easier to manage credit and payments more effectively.
They'll know everything about that customer; where they are up to financially, what other contracts they're involved with etc., which means no guesswork when looking at payment terms or chasing late pays.
Having this process formalised also gives your customers a point of contact if any queries do arise regarding payment issues or outstanding invoices.
While constant contact can be time-consuming, you can employ credit control platforms like Chaser that use cutting edge automation to make follow-ups easy and effort-free.
It's always a good idea to have a watch list in place to track those customers who have become problematic or to pick up early signs of credit issues.
By having an overview of your customer's financial health, you can better adapt your credit control processes to match their circumstances.
With credit control software like Chaser, this process becomes even easier - just set up a watch list that will notify you whenever there are changes in the credit score or payment status for any given customer.
Being able to 'red flag' a customer means you are less likely to get caught out by their poor payment behaviour or even potential bankruptcy.
You can’t expect to have good credit control without clear credit control policies.
This includes credit limits, credit terms and credit line renewals.
Your credit control policies should be clearly communicated between you and your customers to prevent any potential disagreements or misunderstandings in the future.
Ensuring you have effective credit management processes in place for both existing and future clients will help to protect your business from nonpayment or late payment.
It's important that these are implemented at all stages of your relationship with a client. This includes:
For credit control to work effectively, it's critical that you have the right processes in place early on.
If your credit management process is based upon simple spreadsheets or notes taken on scraps of paper - these will not offer enough information about customers at any stage of creditworthiness.
You'll need a credit control system that can support creditworthiness throughout the lifetime of your customer relationships.
Proactive credit control means that instead of just responding to bad payment behaviour after it happens, you can actively address issues before they develop into larger problems for both sides.
For example, if a customer has been experiencing cash flow difficulties due to late deliveries from one of your suppliers, take steps now to help them resolve this issue as soon as possible - such as allowing more time on their credit terms or discounting early settlement discounts.
Some of the best ways to institute proactive credit control include:
Ideally, you'll want to identify the person responsible for paying the invoices with each new customer and build a close relationship with them.
Having this relationship in place will allow you to be aware when customers are struggling financially and there is a good chance they may not be able to pay their invoices.
It also means you'll know who the best person is to apply pressure to if your invoices aren't getting paid on time.
When credit control receives credit notes or other credit-related queries, it's important that they are answered speedily to avoid delays in payments and the formation of additional debt.
By getting credit control to answer these queries promptly, you are not only avoiding any more debt but speeding up your cash flow.
To make sure credit control stays on top of who is paying late, you may want to consider using a system like Chaser's Credit Control & Invoice Management solution which can automatically send out reminder emails when payment is due, helping improve your cash flow by ensuring debts are paid on time every time!
The benefit of using an automated system is that credit control can focus its efforts on collecting debts that may be more pressing.
For example, if a customer has gone over their credit limit with no formal credit agreement in place, credit control needs to take action before the debt gets out of hand and becomes unmanageable.
By using an automated system like Chaser, you make sure all emails are sent out automatically without human error by having set parameters for different situations (i.e overdue invoices).
These can then be customised depending on your business requirements making them very specific to your industry. This means less time spent checking each individual case manually which is where mistakes tend to occur!
The system will allow you to monitor who owes what, how much and their credit limit.
Credit checking is a hugely important part of the credit control process.
As credit control is about being able to manage debtors and credit exposures, it's important that you have the right systems in place with good credit checking.
All customers should be credit checked as part of their onboarding process, but credit checking should also be ongoing throughout the relationship.
Credit limits should be set at each credit check and then credit checked again to make sure it's still appropriate for their sales levels.
Your credit limit is a key indicator of how risky a customer is, so if they breach this more than once it could mean you have an issue with credit control.
It's important that you have credit check systems in place to increase your chances of identifying any credit issues early on, therefore allowing you to react accordingly.
If the customer breaches their credit limit more than once they are likely to be a bigger risk and depending on your business needs will need further investigation or immediate action taken against them.
You may need to update your credit limit policy and credit check system if you want a more accurate view of the risks involved with each customer so that you can be proactive in dealing with any issues before they have an impact on cash flow.
This could mean increasing credit limits for some customers while reducing them or even cancelling credit for others.
Part of being proactive is addressing the situation in front of you. If you don't have the resources to implement effective credit control yourself, then outsourcing might be the solution you're looking for.
An outsourced credit control service, like the one offered by Chaser, can take over the credit management responsibilities from you so that all of your attention can be on growing and improving your business.
There are many benefits to choosing to outsource your credit control, including:
In conclusion, credit control is a complex process that requires adequate time and resources if it is to be done effectively. If you lack either of those things then an effective automated system, like Chaser, or professional outsourcing might just provide a solution.