Credit Control - A Practical Guide to Keeping Your Business Financially Healthy
Credit control is essential for every business, even though it's often overlooked. It’s more than just keeping track of who owes you money; it’s a smart, proactive approach to getting paid on time and maintaining a healthy cash flow.
Finding the Right Balance
Managing credit control is like walking a tightrope. You want to ensure payments come in promptly, but being too pushy can harm your customer relationships. The key is to strike the right balance, keeping your clients happy while ensuring your business stays financially secure.
Why Good Credit Management is Vital
Good credit management is your safety net. It protects your business from late payments and bad debts, which can quickly lead to:
Cash flow issues: Late payments can make it harder to cover your bills, sometimes leading to extra costs like bank fees.
Disruptions: When your cash flow is interrupted by unpaid invoices, it can stop you from investing in growth or paying your suppliers on time.
Financial instability: If bad debts pile up, it can weaken your financial position and even threaten your business's long-term future.
Get Ahead of the Problem
The best way to avoid late payments and bad debts is to address potential issues from the start. Here’s how you can stay ahead:
Collect the right information: Make sure you have all the details you need from new customers—everything from their business name and address to contact details for accounts payable.
Check their credit (if needed): Running credit checks on new clients can give you an idea of their payment habits.
Flexible payment options: Offer early payment discounts or instalment plans to make it easier for customers to pay on time.
Setting Up a Clear Credit Control Process
Having a solid credit control process in place makes it much easier to stay on top of payments. Here’s how you can create a system that works:
Day-by-day strategy: Outline the steps your team needs to follow from the moment an order is placed to the day the invoice is paid.
Teamwork: Make sure everyone involved, from senior management to the accounts team, is on the same page.
Communication: Send invoices promptly, follow up politely, and escalate if necessary—sometimes using a collection agency for persistent issues.
Common Credit Control Challenges—and How to Solve Them
Challenge #1: Late Payments
Late payments are one of the biggest challenges businesses face, particularly in volatile markets. When customers delay payments, it can create a ripple effect that impacts the entire financial structure of a business. Cash flow becomes restricted, which, in turn, affects your ability to pay your own suppliers, employees, and bills on time. Additionally, late payments often carry hidden costs—overdraft fees, penalties, and the lost opportunity to invest or grow your business. The longer payments are delayed, the higher the risk of these receivables turning into bad debts, further straining your financial health.
Solution:
Keep a close eye on your sales ledger and update your cash flow forecasts regularly.
Offer early payment discounts to encourage quicker payments.
Provide flexible options like instalments if customers are struggling to pay in full.
Challenge #2: Damaged Customer Relationships
Maintaining positive customer relationships while ensuring timely payments is a fine line to walk. When payment issues arise, it can strain the trust between you and your clients, potentially affecting future business. Sometimes, communication breakdowns can cause frustrations on both sides, especially if the invoicing or payment processes are unclear. Strained relationships can lead to lost repeat business, negative reviews, or damage to your reputation, which takes time and effort to rebuild. It’s important to strike the right balance between being firm and maintaining the professionalism needed to preserve your long-term partnerships.
Solution:
Clear, friendly communication is key. Be polite yet firm in your reminders.
Make sure your payment terms are always clear, and follow up consistently with customers.
Challenge #3: Lack of Technology
In today’s fast-paced world, relying on outdated or manual systems can leave your business behind. Many businesses struggle with credit control simply because they lack the necessary technological infrastructure to streamline their processes. Manual data entry, paper invoices, and disparate systems make it difficult to track payments, leading to inefficiencies, errors, and missed payments. In the absence of modern tools, staying on top of outstanding invoices becomes time-consuming and prone to mistakes, which can delay collections and negatively affect cash flow.
Solution:
Modernise your credit control with software that provides real-time updates on payments.
Look for tools that integrate with your accounting systems, reducing errors and saving time.
Challenge #4: Ineffective Risk Assessment
Many businesses, particularly smaller ones, don’t invest enough time in properly assessing the credit risk of their customers. This can lead to taking on clients who consistently fail to pay on time or who default on payments altogether. Relying on outdated credit data or not setting specific credit limits for customers leaves your business vulnerable to financial instability. If you’re not monitoring your clients’ payment behaviours and risk levels, you may end up with a higher number of bad debts, which can erode your financial security over time.
Solution:
Run credit checks and set appropriate credit limits for new and existing clients.
Monitor payment patterns and address issues as soon as they arise.
Challenge #5: Staff Training
Your team plays a crucial role in maintaining efficient credit control, but without the proper training, they may lack the skills needed to be effective. From using financial software to time management and negotiation skills, the capabilities of your accounts receivable team can make or break your credit control efforts. Investing in the proper training for your team helps them stay on top of payments, communicate effectively with customers, and address overdue invoices in a timely and professional manner.
Solution:
Invest in training your accounts team on both the software you use and effective time management.
Avoid Common Invoicing Mistakes
Make sure your credit control efforts are efficient by avoiding these common pitfalls:
Unclear payment terms: Always state your terms clearly on every invoice.
Slow invoicing: Send invoices as soon as possible after completing the order.
Empty threats: Don’t make threats unless you intend to follow through. It’s better to be consistent and polite.
Boosting Success During the Sales-to-Payment Cycle
Here are some practical steps to help you improve your credit control process:
Invoice quickly: Get your invoices out immediately after fulfilling an order. It’s also worth considering electronic invoicing for faster delivery.
Be clear: Always include payment terms and conditions on all your correspondence.
Build relationships: Keeping in regular contact with customers can encourage prompt payments and strengthen business relationships.
Offer multiple payment methods: Make it as easy as possible for customers to pay you by offering various payment options.
Reward early payments: Offering small discounts for early payments can help you get paid faster.
Credit Control is a Continuous Process
Good credit control isn’t a one-size-fits-all solution. It’s a process that requires a careful balance of clear communication, appropriate tools, and ongoing management. By being proactive and consistent, you can reduce late payments, keep cash flow healthy, and build stronger relationships with your customers.
If you would like any advice or support on managing your credit control processes please get in touch.