Setting up a credit control system

Articles > Setting up a credit control system

Every business should operate a credit control system. Whether you only have a handful of customers or a massive sales ledger, the principles are largely the same. The objective of the exercise is to minimise the time from when work is done to cash being collected. This is essential for the running of a successful business.

The following are some suggested steps:

1. Credit check your customers. All your customers should be credit checked before you start trading with them and on an ongoing basis from time to time to ensure they are still credit worthy. New customers should have credit limits set for them.
2. Prompt invoicing. A system should be in place to ensure that invoices are raised promptly. As soon as work is completed or goods are despatched, the invoice should follow.
3. Establish terms and conditions of business to include payment terms. You should agree payment terms with all customers in advance which generally should be in line with your standard terms and conditions of business. Whilst historically, 30 days credit has been the normal time period, recognising the importance of cash control is critical to the success of a business and you may want to try and impose more stringent payment terms. This may include part payment in advance, payment by way of proforma invoice, or any other terms.
4. Use a computerised sales ledger system. It is surprising, even in this day and age, the number of businesses that don't make use of technology to manage their debtors. Having a proper sales ledger system is critical for good credit control.
5. Send monthly statements. A good credit control sales ledger system should enable the automatic generation of statements be they on paper or in digital format. This should be run on the first or second day of each month capturing all transactions up to the end of the previous month.
6. Institute an automatic reminder procedure. A good sales ledger system will permit you to generate a number of credit letters based on the length of time an invoice has been outstanding. You should be able to include free formatted letters of increasing degrees of sternness.
7. Appoint someone to manage credit control. This should be a trusted member of staff who should not only chase debts, but keep a record of all telephone calls and letters and deal with any legal actions necessary.
8. Try and follow up invoices before their due date particularly with larger invoices, a telephone call a few days before the debt is due can often be a good course of action. Questions to be asked may cover customer's authorisation process and when the invoice is due to be paid.
9. Institute a stop list procedure. It is critical in business to ensure that everyone in the organisation, particularly sales staff are aware when the customer is in arrears with payment to ensure that further goods and services aren't supplied. A centralised stop list should be instigated and managed.
10. Institute legal proceedings. Where all else fails, it may be necessary to begin legal proceedings. Whether you do it yourself in the small claims court or by the issue of a statutory demand or take legal advice, matters should not be allowed to drift. A good credit control system will have clear guidelines as to when such action is taken or handed over to a credit control agency.