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Should you be reassessing your credit management process?

late or non-payment

Offering credit to customers will always pose risks to your business, however having the most effective credit management process in place will significantly reduce this risk and your cash flow will ultimately benefit. Every business should continually monitor their credit management activity so that any downfalls in the process can be addressed promptly; poorly executed credit management can create significant issues for a business, including, late payments, bad debt and in worst case scenarios, insolvency.

Understanding when to reassess your credit management process

Debtor days have gone up

Calculating debtor days will not be an ideal performance indicator for every business, however for many businesses it can provide a good indication of how effective your credit management process is. If your debtor days have risen, however, don’t make the mistake of assuming the issue lies with the performance your credit control department as there may be issues earlier on in your process that is delaying payment.

Credit control and sales are working against each other

Your sales and credit control teams should be working in harmony with each other, as these are the two-main customer facing roles within any business. Sales should understand how to effectively on board new customers; this should be making them aware of contract details such as, payment terms, payment details, as well as gathering appropriate details of who to send invoices to, any invoicing requirements (i.e. purchase order number), and ensuring they can demonstrate that your business’ T&Cs have been made known to the customer and acceptance can be evidenced.

No leverage to encourage payment

Chasing for payment will be much more difficult if you don’t have or aren’t aware of any leverage that you can use to encourage said payment. Leverage can be several things, including adding interest to a client’s overdue invoice or putting your customer on credit hold for late or non-payment. Having the threat of added interest or a hold in work carried out can prove to be a highly effective tool to get your customer to pay more quickly.                        

Bad debt? [cost of replacing bad debt]

If your business has had a bad debt (a debt that will not be recovered) then this should certainly prompt you to reassess your credit management process to discover why this had been allowed to happen. The issue could lie in a number of aspects, such as:

  • Not credit checking your customer at the outset
  • Not having evidence of acceptance of T&Cs
  • Poor chasing of a customer
  • Being unaware of your customer having financial difficulty

When you have had a bad debt, it will not just be the amount of the debt that the business has to replace, it is also the cost of sale (see table below).

cost of bad bebt

If you need help in assessing your business’ credit management process, take a look out our consultancy service today 

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