Credit control is the process of control over payments coming into and going out of the firm. It is mainly concerned with the firm’s creditors (people who the firm owes money to) and the firm’s debtors (people who owe the money to the firm). Tight credit control is important if a firm wants to avoid cash flow problems. Allowing customers and clients to defer payment for goods and services is a common and often necessary practice. Credit control is the totality of the policies, procedures and practices which ensure that the total amount of credit extended and the period for which it is extended are consistent with the organization’s policy.
These will include ensuring that credit is granted on a systematic basis; the costs of extending credit are adequately recovered; the customer or client continues to pay within the agreed terms; and the need. for access to liquid funds is achieved Remember: "It's not sold until it's paid for! " OBJECTIVE OF STUDY PURPOSE OF CREDIT CONTROL Effective credit control maximizes the cash flows from each area of the business and minimizes the risk of bad debts in an organization.
It is vital that all decision makers in the organization are aware of the importance of cash management and fully co-operate with Finance Directorate Staff who manage the administrative process. This credit control policy will enable the organization to run an efficient and effective method of credit control management. The long term aims of the policy are:- 1. To minimize the risk and proactively manage the debt so as to have no balances over one year old on the ledgers. 2. To create a new credit control ethos within the organization that will bring strong working relationships between the central team and the top management.
NEED FOR CREDIT CONTROL 1. Good credit management is an essential component and a fundamental part of our commercial strategy. It is as important as the sales and the profits stated on our monthly profit and loss accounts but should not be at odds with our desire to provide excellent service and care to our customers. 2. This policy and its implementation will ensure that the revenue we record translates itself into cash according to the terms of credit, which we extend to our customers. 3.
A credit policy is not designed to be a restrictive straight jacket. The skill is to combine controls with sensible application of policies. Customer satisfaction at a profit. 4. A credit policy is not something that is only operated by the credit control department. All staff involved with customers, in any way, need to be aware of the credit policy and ensure that it is operated consistently. Customers do not have a divine right to take credit. Payment to our terms is an integral part of the contact the customer has entered into.
Ensure that one person in your organization, at a suitably senior level, is ultimately responsible for negotiating, granting and supervising credit and for ensuring the prompt collection of monies due. Appoint someone who can supervise the Credit Controller and can be accountable if the credit position becomes questionable. The exercise of this authority should not detract from the relationships with customers and clients of individual members of staff, especially specialist sales staff. The latter still have a responsibility for ensuring that sales are made and goods and services paid for in.
accordance with the firm's terms and conditions 2. INTRODUCE A CREDIT POLICY Introduce a clear cut maximum credit policy–covering both amount and duration of credit. Write it down so it cannot be changed arbitrarily. Be sure that it is known to all your staff who may be involved in granting credit. Be sure also that customers and clients are informed about your policy. The Late Payments of Commercial Debts (Interest) Act 1998 gives small businesses the right to charge larger business customers interest on Overdue accounts. 3. RE-EXAMINE TERMS OF SALE
Re-examine all quotations, price-lists, invoices, statements and similar documents which you issue. Do they show the terms on which you do business, especially the terms on which you grant credit? Don't be afraid of telling potential customers and clients your terms. If you are serious about credit control, they must know sooner or later. The chances are that they will respect you as a supplier with a businesslike approach rather than as one 'making up the rules as the game progresses', or, worse still, having no rules at all.
Be aware that contracts are established and modified by each successive piece of paper prior to invoice. Care needs to be taken to ensure that your credit terms are not replaced by those of a customer or client as detailed on their order document. 4. ASSESS CREDIT RISKS Be clear in your own mind how you assess credit risks for new and existing customers and clients and how you impose limits in terms of a customer or client's indebtedness and in terms of time.
Satisfy yourself that you and your staff do this in a systematic way and that the potential volume of turnover which a customer or client may offer is not a factor which you take into account. Recognize that salesmen are optimists by nature–especially if commission is involved. Pursue other sources of information before increasing or establishing credit facilities for existing or potential customers or clients. Sources might include trade and bank references, credit agencies and rating registers.