How to control credit: A small business guide

Posted by Siobhan Hitchmough

If you’ve ever considered offering credit terms to your customers but don’t want to put your company on the line here’s the step by step guide for you.

In business, it’s a sad but true fact. Many profitable companies fail because they cannot meet their commitments with readily available funds and failure to control credit is the prime cause of this situation.

As we all know, offering credit terms is a common and often necessary practice designed to allow customers and clients to defer payment for goods and services. If you’ve ever considered offering credit terms to your customers but didn’t like the thought of putting your business on the line here’s a step by step guide for doing it right.

Recognize the Effects of Bad Debt – Ensure everyone within your company understands the consequences of bad debt. Stress the reduced bottom line profits and what it would actually take in additional sales to generate those profits back. Don’t forget to communicate the resources involved in recovering bad debts too. The time, energy and effort it requires and how it may lead to difficult relations and the loss of customers long term.

Introduce a Policy – Make it clear cut! Focus on both duration and amount of credit. Put it in writing and be sure to circulate it to anybody who may potential issue credit at your orgnaization. Communicate any changes internally & externally immediately.

Assign Responsibility – Ensure that one senior person is tasked with the responsibility of negotiating, granting and supervising credit and its collection. Ensure that by exercising their authority the selected individual does not detract from the hard earned relationships they may have established (for example try to avoid using sales staff)

Assess Risk – Have a well thought through procedure as to how you assess and impose credit risks for new and existing customers and clients. Resist the temptation to offer credit based on the potential turnover volume a client can achieve. Definitely don’t forget to consult independent sources of information before increasing or establishing credit facilities. Good credible sources include credit agencies, ratings organizations and trade/bank references.

Review your Terms of Sale – If you are serious about credit control, don’t be afraid of telling your customers your terms. Re-examine all invoices, price-lists, quotations and other documents. Make sure your terms are clearly stated and in line with your current policies.

Monitor your Customers – Systematically review the financial standing of all your customers – especially when business shows a sudden increase. Its always worth comforting yourself in the fact that any increase in business is attributed to your wonderful product, service or sales staff and not because your competitor is refusing to supply because of bad debt.

Look at your Invoicing and Statement Process – Look again at the interval between the supply of goods and services and the submission of invoices. Can the process be speeded up? Remember, the date on which a customer receives an invoice or statement has a critical impact on when they make payment.

Start a Collection Procedure – Introduce a collection timetable and systematically follow it. Be politely firm and always record details of all contact during your collection routine.

Follow these steps and you’ll reward those customers who genuinely appreciate and respect your credit practices and procedures. Moreover, you’ll eliminate those that seek to use your funds to finance their business.

Siobhan Hitchmough

About Siobhan Hitchmough

Siobhan Hitchmough is a customer advocate, community manager and part-time tutorial wrangler. When she's not seeking out new challenges she leads the community and support team at inFlow Inventory.

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