Do you struggle with hours of manual follow-ups and late payments? Do you find yourself in a feast or famine financial situation?
You’ll be happy to know that there is an easy fix with a host of additional benefits.
Effective credit management does two important things:
1. It builds better relationships with your customers.
2. It stabilises your business cash flow.
Optimizing your credit management processes
Creating a personalised credit management system can significantly reduce the financial risks of unpaid invoices and extended payment periods.
We know that healthy cash flow systems are vital to any business. If you have no credit management process or systems in place, how do you avoid late payments or bad payment habits by customers? How do you ensure that customers pay their bad debts on time? A well-implemented credit management system increases a company's liquidity, diverting funds that can be put to better use, such as in other investments or buying materials in bulk.
A lack of cash flow issues projects a professional and positive outlook. This, in turn, can improve relationships between company and customer. While we all want more business, there is often hesitancy in turning the new business into paid business.
Credit management is the answer to this. Let's take a look at some top tips for successful credit management and a stress-free business.
What exactly is credit management?
Credit management refers to the granting and managing of credit accounts to new and existing customers within a company. If your company offers credit accounts, they need to be monitored and reconciled regularly. A credit management process often involves managing credit with existing customers, analysing a customer's creditworthiness, and streamlining the credit application process.
Cash flow is essential to keep any company in the black. Customers who forget to pay or make excuses and regularly delay payment put undue pressure on a business. Constant late payments or defaults can ruin an otherwise successful business, and abused credit usage may result in strained customer relationships.
However, monitoring these systems is tedious and time-consuming and can pose a financial risk to a company due to simple human error during the data capture process. This is why it's important to establish a credit management team to perform a thorough credit analysis to examine a customer's creditworthiness. This risk analysis process will reduce potential credit risks and improve a company's financial position.
Why a credit management system?
A credit management system offers a way to reduce the risk of credit accounts within a company. It's a simple way to keep track of incoming and outstanding payments, offering credit and credit accounts.
While the customer credit management process can be done manually (and has been for many years), it is beneficial to a company to turn to an automated system in the digital age. This frees up employees to dedicate time to other areas and can save a business time and money. Whether you offer credit on a business to business scale or only provide customer credit to individuals, digitizing your systems can improve your business's cash flow and streamline the credit management process.
Credit management software
Credit management software can be custom designed to suit your company's financial and business needs. It can assist a business during times of financial change and assess how much credit to offer a customer.
Credit management databases
These systems also create customer databases. At any time, you can pull a customer's records to check their payment history, payment trends, and any other information required. If any concerns are raised, credit accounts can be adjusted automatically to benefit the company and lessen the risk of a slow-paying customer. These systems foster effective credit managers that excel at identifying risks and collecting payment.
Cloud-based credit management process
Many systems work on an online or cloud-based interface, which makes them easy and convenient to use. Some even give you access to your data while offline, making it convenient and easy for a credit manager to review credit transactions and perform a credit review process at any time.
What system do you need?
Based on its requirements, a company may work with one or a few different system options. In general, a credit management process involves several systems that work together to collect data, provide insights, record transactions, and communicate with customers.
Ask yourself: What are my invoicing systems like? Which customers need to be accepted with special conditions? What should I be monitoring? What employee involvement do I need?
Once you have answered these questions, you are better positioned to decide which systems are best suited to your company.
- Acceptance system – depending on the data gathered, a new customer is either accepted or declined. This can be done manually or via an automated system.
- Monitoring system – a system checking portfolios for continuous data and insight into customers.
- Invoicing system – invoices and reminders can be sent out either manually or on an automated system.
- Bookkeeping system – a record of amounts payable and received on a system.
- CRM system – a customer relationship management system. Records of contracts, agreements, and customers. (As well as complaints.)
Some management systems can be integrated into your existing invoicing or data capture programs. This way you only need to purchase what you need at the time and not necessarily an entirely new interface. Providing your credit team with the necessary tools for tracking payments and creating credit reports will lead to much better credit utilization and fewer instances of bad debt.
The importance of credit
Credit is important for a business as it makes allowances for materials and machinery to be purchased before products and profit can be made.
For a customer, (especially in today's economic climate), credit is important for making larger purchases that they need but simply can't afford at the time. Spreading these payments out is simply part of our modern financial lives now.
Credit can also prove useful in an emergency when unforeseen expenses raise their ugly heads!
Abuse of credit
As with all things, with the good, comes the bad. Customers can take advantage of a credit account, or slip up in their payments, and for small and medium businesses this can have devastating effects.
Ignoring bad habits and unpaid debt may find your company in hot water. This is where credit management systems come into play to minimise risks for your company and improve financial stability.
If customers don't pay you, you cannot pay your suppliers. This will lead to a lack of supplies and services, and soon you will lose production time and customers, and your good reputation.
Tighten up
If you have poor credit management systems (or none at all), you may find that even your best customers will sense it and start to default on payments. They may start to ignore an agreed upon payment period, or they'll conveniently forget about your company's credit policy. In some cases, they may stop communicating with your company's credit manager, or ignore payment plans that you have in place.
These issues can lead to lower days sales outstanding figures and they may affect your company's financial health. If you notice good payers slacking off with overdue payments, maybe it's time to check your systems and remind customers of your payment terms.
Administrative excuses
Administrative excuses are often used as a delay tactic to avoid making payments on time. Keep an eye on customers that often have “admin system difficulties.” It can also hint that your systems are not effective, and customers have noticed and are taking advantage.
For example maybe your delivery and payment conditions aren't clear, or perhaps you haven't explained your credit management policy clearly to your customers.
Frequent queries and complaints
Also, look out for customers that always have a query or a complaint. These can be used to excuse late payment or extend credit terms at the expense of your business. If the average days sales outstanding value for an existing customer is quite low, then it may be time to perform a credit review or remind them of your credit policy.
Good credit systems can capture this data and make adjustments to optimize accounts receivable collections, or to cancel bad debt credit accounts if needed.
Streamline your systems
While no company benefits from inadequate systems, small and medium-sized companies are at greater risk. Relying on fewer income sources ties up finances, and the threat of losing the business is that much greater after one large payment delay or default.
Rumours of bad credit and ratings can be damaging to a business. When opening credit accounts with customers, make sure that you have a system in place and stick to it. Customers will take advantage if they feel that they can.
Credit checks and trade terms
Have credit reference checks in place and ensure payment terms are visible and adhered to. You may want to request bank and trade references from financial institutions for added safety, or perform a thorough credit analysis before offering a customer credit. If you find that you have repeat offenders, look at changing collection methods and examine their payment history to see if there's a potential credit risk.
Where possible, research your customers to learn their credit usage habits during your checks. Bad payments on credit accounts will flag with other suppliers and you can then better assess the risk to your company if you're issuing credit.
Credit risk systems
Always have a fall-back option when it comes to protecting your livelihood. Look at all the options available for business insurance to safeguard your company from bad debt. It may sound like a simple suggestion, but it may save your business should one of your bigger customers declare bankruptcy or become insolvent.
Extending credit
Improving your business's financial stability means having more options for extending credit to customers. Before you do this, it's important to set credit limits and examine a customer's credit history to reduce the likelihood of late payments and bad debts. The last thing you want is overdue payments after extending credit to boost customer relationships. Analysing audited financial statements can also be an option when examining a company's credit history.
Overdrafts
Watch your company's overdraft limits. If you find that you are slipping into overdraft often, take a look at your business asset management policies as well as your credit systems.
Widespread effects
Cash flow issues can affect a company in many ways. While bankruptcy may be the main concern, employee morale can be a silent danger.
Employees see, hear, and sense cash flow problems, and it makes them uncomfortable. Companies with unsettled employees face additional delays in production, as well as the potential loss of staff. This leads to loss of income and further money problems and the expensive cycle of replacing and training staff.
Most credit systems are easy to use. Once employees see a simple solution to the cash flow, morale will increase, and employees will settle. The bonus is that automated systems require less work. This means resources directed elsewhere, employees under less pressure, and an all-round happier work environment.
All systems go
Once you have done your research and decided what is best for your company, you can start enhancing your systems with an effective credit management policy.
Maybe you just need a better-invoicing programme, maybe more efficient reminders. Whichever it may be, you are on the road to improve cash flow with stronger, proven systems and good credit management.
Are you ready to get started with your new systems?
If you are looking for further information on credit management systems or software, take a moment to book a demo with one of our friendly team members. We'll be happy to walk you through one of the simplest ways to stabilise your business and reduce financial pressure.
