Category Archives: Credit Control Procedures

Credit Control Tips (Part 2)

Having an effective credit control mechanism is now more important than ever. A recent study by the Small Firms Association found that over 60% of small firms have had to resort to other forms of finance due to the adverse impact on cash flow caused by late payers. The study also found that invoices issued by small Irish firms are now taking, on average, 66 days to get paid.

Late payment problems aren’t confined to small businesses. Large firms have also seen cash flow problems skyrocket as customers take longer to pay for goods or services supplied, while banks have reduced overdrafts and other working capital support.

“A sale isn’t a sale until the money’s in the bank”. The fact is, while a company may experience an increase in the number of orders placed and invoices issued, unless adequate credit control policies are enforced from the outset, there may be delays in collecting payments or, worse still, much of the sales ledger may end up as bad debt.

Top 10 Credit Control Tips

1. Ensure you have a robust but flexible credit control policy. Agree specific parameters and stick to them.

2. Check credit references thoroughly. It’s not uncommon for a potential debtor to tender “friendly” referees when applying for credit. Take advantage of your network of contacts within the industry and check ALL known suppliers within your trade.

3. Know who you’re dealing with. Make sure you know the correct legal entity of the customer you’re trading with as this will dictate who you will need to pursue if a bad debt arises. If it is a Ltd company, consider asking one or more of the Company Directors to sign a Personal Guarantee, making them personally liable for the company’s debts.

4. Make sure your Terms & Conditions of trade are exhaustive. Include a watertight Retention of Title clause and outline exactly how you will handle queries and disputes. Explain what will happen in the event of a bad debt and whether late payment interest will be charged.

5. Regularly review your sales ledger. Ensure your credit controller has issued all the relevant credit notes and the balances on the ledger are correct. DO NOT put off issuing credit notes as this will only delay the process of cash collection. Conduct a credit control review at least once a month.

6. Regularly review credit limits. Credit limits are not static – they can be reduced as well as increased. If a customer is ordering significantly more than normal, it could suggest that they have been disallowed credit elsewhere because of payment problems.

7. Avoid wearing your sales hat when making credit control decisions. Take a commercial view based on the profitability of the account, the customer’s ability to pay, their reputation and their trading history with your company.

8. Don’t become a free overdraft. Habitual late payers and bad debtors can significantly impact on your cash flow. By not paying your invoices, the debtor may avoid using their own overdraft while placing you in an embarrassing position with your own suppliers.

9. Proactive credit control equals respect. The fact is, most companies only pay when they are asked to do so. If you take an active, professional approach to chasing invoices before the due date, this should ensure your payment is on the next cheque run. If it is not, then you have an opportunity to address any issues that may delay payment.

10. Credit control and debt collection outsourcing. Companies who don’t have the in-house systems, expertise or knowledge to manage their credit control have the option to outsource part or all of their function to specialist 3rd party agencies. Potentially this could free up valuable time and resources while allowing an experienced team to manage the debtors’ ledger on your behalf.

In theory, it’s possible to avoid bad debts altogether However such a zero risk strategy is likely to stifle overall profitability. The aim of any successful business should be to achieve maximum profits by balancing risk and profit. This is what an effective credit control policy should set out to achieve.

As the saying goes – “Turnover is vanity, profit is sanity, but cash flow is reality”.

Credit Control Tips (Part 1)

The survival and prosperity of all small, medium and large businesses is dependent upon receipt of payment from customers in respect of the product and services that the business provides and invoice for.  It is not sufficient to secure the sales order and provide the product if that sale cannot be converted into cash. Cash is the lifeblood of every business and if debtors don’t pay outstanding invoices promptly it can spell disaster.

Many businesses are forced to offer credit terms to customers in order to remain competitive and win orders but this has a negative effect upon their cash flow.  The damage caused by non payment (bad debts) can also be significant, and the longer the period of credit that is offered the more opportunity there is for the customer’s circumstances to change, and hence payment to be delayed – in some cases permanently.  The secret to success is good credit management and credit control.

There are two aspects to successful credit management.  The first is taking care in choosing the businesses that you will offer credit terms.  The second is to develop and employ an effective system of credit control techniques to collect unpaid invoices.


The following tips may be helpful when deciding whether or not to offer credit terms to a customer:

  • Always confirm the exact trading name of the customer e.g. XYZ Limited; XYZ Plc; Mr X and Mr Y trading as XYZ; or Mr X trading as XYZ.  All of these are uniquely different and knowing the exact trading name can be vital in pursing a customer for payment through the legal system, should the need arise.  The customer’s headed stationery, business cards or brochures can often be helpful in determining the exact name, although remember they can be incorrect.
  • Offer the minimum credit period that will be competitively acceptable.  The longer the credit period the more chance there is that the customer’s financial circumstances may change.
  • Make sure that you have all the customer’s contact details: addresses, phone numbers, fax numbers, mobile numbers, email addresses etc.  If possible, take the contact details of the prime movers.  These can be extremely helpful if you need to contact the customer regarding unpaid invoices in the future.
  • Trade references can be helpful but most businesses will have at least a couple of customers that will speak well of them.
  • Credit information about customers can be purchased from a variety of providers.  This can give you insight into the financial position of a business.  You can also ask the customer to provide you with financial information about their business.
  • If a considerable amount of credit will be at stake consider visiting the customer to confirm that the address given exists.  A great deal of information about a business can often be gained just by visiting their offices and noticing what is going on e.g. are they busy or is trade slack?
  • Ensure that the customer has seen your terms of trade and has accepted the credit terms that you have agreed to offer.
  • Make sure you understand the process for submitting your invoices and receiving payment from the customer e.g. who do you send them to, when is their cheque run etc.


The following tips and hints may be useful in ensuring that you have an effective credit control process in place to collect unpaid sales invoices:

  • Understand the customer’s payment process and procedures e.g. if you know the date that they undertake their monthly cheque run you can time your statement accordingly.
  • Consider “pre-dunning”, calling the customer before payment is due to confirm that your invoice has been received and that there are no reasons for non payment.
  • Establish a systematic approach to issuing statements, sending chasing letters (which gradually become firmer) and calling the customers.
  • Keep copies of any correspondence and notes about telephone conversations.  Confirm conversations in writing and if possible gain the customer’s written agreement to any payment promises.
  • Try to call back and speak to the individuals concerned rather than leaving messages on answer machines.
  • Consider other methods of contacting debtors e.g. text messages to mobile numbers or email and fax.
  • Always remain calm but assertive on the telephone.
  • Follow up promptly on any broken promises of payment.
  • Shorten the process by emailing or faxing documents rather than posting.
  • If necessary consider stopping further deliveries once invoices are overdue.

The field of credit management and credit control is vast and these are only a few key points to consider.  Many businesses have staff in-house that undertake this work for them but there are alternatives.

Factoring companies specialise in out-sourcing such services for their clients.  They have specialist staff that can undertake the collection of your sales ledger for you and in many cases this can be achieved with cost savings.  The cost of factoring should be weighed against the cost of recruiting specialist staff or handling the task yourself.

It is also possible to receive credit insurance which can eliminate the need for you to worry about which customers are credit worthy.  The factoring company will research the customers standing for you and they will grant an insured credit limit for each customer.

Improve your Credit Control Procedures

Some businesses have slow-paying customers or past due balances because they didn’t “train” their customers in the beginning. It is important that your customers know your credit policy and/or terms of payment before they become customers. Reiteration of your credit policy, when payment is overdue, is a good step to take in trying to obtain payment. Always ask for payment when it is justly due.

You should never extend credit to a new customer without having them complete a credit application and go through the credit approval policy. Once you extend credit, it is important to maintain accurate records on an account payment history.

Adhere to your collection policies no matter what. You cannot see the future or changing market conditions. Try to keep current with trade reports pertaining to specific companies and industries.

Change your collection letters frequently— you can make them stronger and more action-oriented.

Discourage payments on account or changes in payment terms. Too many payment plans or changed payment terms can impair your cash flow.

When you receive payments “on account” be sure to follow up right away with a letter or phone call thanking them for their payment and telling them what their new balance is and when to send the next payment. Don’t ask them when they will send the payment; tell them when to send it.

On large accounts, call or send a reminder just a few days after terms if they become delinquent.

Ask to speak to a manager or owner when making collection calls rather than speaking to a secretary or receptionist. Go right for the decision maker.

If a customer disputes the quality of merchandise or service, price or delivery, you should attempt to resolve this right away. Insist they pay the portion of the bill that they are not disputing while you work out the disputed problem.

If all else has failed, you may want to refer the account to an outside collection agency.

Update your records often, making sure the telephone numbers and addresses you have for your customers are current and up-to-date.

By: Michelle Dunn
Published: June 29, 2007