Cash flow is crucial for any business, so businesses must ensure that their customers pay on time. Debt recovery can be a very time-consuming and energy-consuming task and can still result in failure, regardless of the efforts made. The solution to this can be properly streamlined procedures to identify bad debts beforehand. Therefore, setting an effective and comprehensive credit control and management policy is crucial for getting paid on time.
Getting Started
The first thing to do is to identify the requirements of your credit management policy. It would help if you looked clearly at your business to identify the requirements. The first thing you have to look at is your margin. A bigger margin allows for a more relaxed credit control policy. In comparison, businesses with a smaller gross profit margin might not be able to sustain a significant bad debt, thus making the magnitude of gross profit margin a factor that can’t be neglected in making your credit control strategy.
Consider the following tips for an effective credit management strategy. However, this strategy will enable you to identify existing deficiencies and get a clearer picture with which you can reevaluate your company’s credit control policy and procedures.
Order Stage
In the order stage of your company’s credit control process, clarity in the credit control policy for the sales staff is paramount. This ensures everyone understands the guidelines and procedures for extending credit to customers. Additionally, implementing a credit application form can greatly streamline the process and organize all necessary information.
This practice helps assess customers’ creditworthiness and makes bookkeeping tasks more manageable, reduces the risk of errors, and ensures efficient record-keeping. Furthermore, by having clear policies and organized documentation, your company can effectively manage its credit processes and maintain financial stability.
Use the Credit Application to get the Following Details
When using a credit application, gather essential details such as the company’s name, contact person, and contact information, including phone numbers and email addresses. Additionally, obtain the VAT number and, if applicable, the company’s registration number. Conduct thorough credit checks on new customers, including bank references, and consider obtaining a personal guarantee for high-risk accounts. Establish criteria for credit recipients and be prepared to decline credit if necessary. Analyze your margin and assess the feasibility of credit insurance to mitigate risk.
Moreover, credit limits for new customers should be set to minimize potential losses. Regularly review the creditworthiness of existing customers and document clear Terms of Trade to facilitate recovery processes and deter bad debts. Include clauses in your Terms of Trade outlining fines for late payments or bounced checks, a Retention of Title Clause, and the right to charge interest on overdue payments. Implement streamlined procedures for resolving disputes and clearly define credit terms with a 30-day payment due date after the invoice date. Finally, ensure all parties sign an agreement delineating the payment terms and maintain thorough records of payment due dates for effective credit management.
Invoicing
When invoicing, accuracy is key. Include essential details such as your business’ bank information, terms and conditions, customer details, payment address, order specifics, VAT information, total amount due, payment terms, and applicable discounts—issue invoices promptly, ideally within 24 hours of delivery or service completion. Regularly review monthly statements from your bookkeeping records to track paid invoices and follow up with customers with outstanding balances. However, this ensures efficient financial management and timely payment processing.
Collection
In managing collections, stratify customers into categories based on their payment history: bad, average, and good debtors, each requiring a tailored approach. Contact customers with substantial debts before the due date to prompt timely payments. Follow up on overdue payments promptly, applying pressure for settlement within a week of the due date. Furthermore, late payment fees or interest charges should be implemented as necessary. If efforts to secure payment fail, seek assistance from a solicitor or debt collection agency to resolve outstanding debts efficiently.
Recovery
In the recovery phase, consider suspending supply or delaying ongoing deals if payments remain outstanding past the due date, with timing tailored to each customer type. Consult a solicitor or debt collection agency for legal assistance. Additionally, legal action should be pursued through the court system to compel debt repayment if necessary.
Management
In the management phase, establish clear goals for your credit control policy and monitor them to gauge progress and success. Provide comprehensive training to your sales staff, equipping them with the necessary skills in questioning, persuasion, and negotiation to handle various situations effectively. Regularly assess and refine these strategies to optimize credit management practices.
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