Credit & Risk

Where does credit control fall into cash management?

3 Mins

Credit control is a vital business function that plays a key role in maintaining financial stability. It incorporates various elements that support cash management on a day-to-day basis, whilst also offering a solid foundation for strategic business growth, writes ‘David Tattersall, Head of Client Relations at Handpicked Accountants – an online directory of local accountants.  

Without a strong credit control policy in place, it’s difficult to manage cash effectively. This is because there’s no cohesive system to provide advanced warning of bad payers, and deal with late or non-payment.

So what does credit control involve, and how does it allow business owners to manage their cash flow more effectively? 

Chapter 1

What are the main elements of credit control?

  1. Credit checking new and existing customers/suppliers

  2. Calculating the risk posed to the business by offering credit terms to individuals and trade suppliers

  3. Setting appropriate credit limits, and reviewing/adjusting them as necessary

  4. Providing clear terms of trade and payment on business documentation, particularly invoices, contracts, statements, and payment reminders

  5. Operating a systematic and reliable policy of chasing payments and debt recovery

  6. Having access to accurate management information with regards to debtor days and regular late payers

Chapter 1

Credit control and cash management

When an effective credit management system is in place, the business benefits from predictable cash inflows and owners can plan ahead with more confidence. Cash projections are reliable and highlight any upcoming shortages that need to be addressed.

Credit control falls into cash management at the beginning of a trade or customer credit relationship because it highlights risk, but it also weaves a thread through the entire process of managing cash.

The two elements work in close association - healthy cash flow relies on operating with good credit control. Without it, business owners wouldn’t know exactly how much working capital they had to pay the bills – a situation that introduces a risk of insolvency.

Chapter 1

What constitutes good credit control?

Credit checking existing customers

The same applies to existing customers or suppliers - their financial situation can change quickly, and without a credit check, it could go unnoticed. Even a longstanding business customer with no history of late payment can suddenly decline, and seriously jeopardise cash flow for the creditor business.

Clear payment terms

Clear payment terms should appear on all relevant business documents, including invoices, statements, reminders, and contracts. This includes the deadline for payment, and the interest rate that becomes due on late amounts.

Not only does this remove any doubt about a business’ payment requirements, it reduces the opportunity for a debtor to deliberately query an invoice due to lack of information. Stating the intention to charge statutory interest on late payments can also encourage customers to pay on time.

Chasing payments

Operating with a clear and actionable system for chasing payments – reminders, phone calls, warning letters at set points, for example – helps the business to bring in cash and enables members of staff to easily follow procedures.

Reliable management information

A strong credit control function can feed reliable information into management software, providing business owners with the accurate data they need to make decisions. Knowing the number of days it takes individual debtors to pay is important, for instance, as it shows any pattern of late payment that might be emerging. 

Chapter 1

What are the dangers of poor credit control?

  • Lower business credit score
  • High bad and doubtful debts
  • Unreliable financial data
  • Reduced access to borrowing
  • Poor business reputation
  • Inability to pay day-to-day bills
  • Risk of insolvency and liquidation 

It’s clear that failing to operate with an effective credit control policy endangers good cash management on a number of levels, and can place a business at serious risk of financial decline.

Credit checking new and current customers to establish any potential risk is a straightforward process, and just one action that protects cash flow and reliably informs operational and strategic decisions by management.

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