What is credit control and how to implement a credit control process?

Credit control is a business process that promotes sales by managing the extension of credit to customers. It covers key elements like credit periods, cash discounts, payment terms, credit standards, and debt collection policies.

In practice, credit control makes it easier for your customers to purchase your goods or services by offering attractive payment terms. When managed well, effective credit control can increase sales and boost profits. Establishing credit limits for each customer also helps you manage your exposure to risk and protect your cash flow.

That said, a crucial part of credit control is deciding who qualifies for credit in the first place. If you extend credit to customers with poor credit history, you risk non-payment and unpaid invoices that can strain your business finances.

Credit control is crucial for protecting your cash flow and reducing the risk of bad debts. When you extend credit to customers, you're essentially lending them money, and without proper risk assessment, you could end up trading with businesses that can't or won't pay you on time.

Effective credit control helps you get paid faster, which means you can cover your own expenses, invest in growth, and avoid the stress of chasing late payments. It also enables you to make informed decisions about new clients by checking their creditworthiness before you commit to trading with them.

When you manage credit control well, you'll reduce the chances of accumulating bad debts that could seriously impact your business, and you'll maintain healthier relationships with customers who value clear payment terms and professional processes.

Credit control is the first step in ensuring you're doing business with customers who accept your conditions and can pay according to agreed terms.

Credit management is the next step: it seeks to prevent late payment or non-payment through monitoring, reporting and record-keeping. The stronger your credit control, the smoother your credit management process will be.

Credit control processes help you ensure your company's payment terms and policies are respected. This involves making those terms and actions clear to both your customers and your credit controllers, explaining how you'll issue invoices and what you'll do if they go past the due date.

Here are the essential steps:

• Ensure you have the right customer information: You need the correct legal name of your customers, including the company's entity, correct address, and the name of the person who should receive the invoice. Slip-ups in something this basic can result in invoices going astray, payments being late and your credit control process going off-track at the start.
• Subject new clients to routine due diligence and run credit checks: Check their finances, reputation, business and payment history. Online services such as Experian.com or Duedil.com can provide useful company credit checks.
• Establish credit limits as part of your credit control process: This helps you manage your exposure to risk. Ask yourself what the maximum outstanding amount is for each of your customers, and consider if they regularly pay on time, if your business is cyclical and if your sales are regular over the year.
• Hold regular credit control reviews to check pending and overdue invoices: Use an aged receivables report to track overdue invoices and decide which customers need follow-up. Look more deeply into why an invoice hasn't been paid: has the customer overlooked it, lost it, or is there a dispute that must be resolved?

Part of your credit control process should include when to hand off these issues to your credit management team, so they can speak with the customer and consider various ways to recover payments, such as offering various methods of payment, giving early-payment incentives or changing the credit terms.

Your company should have a formal, written credit control policy to establish robust, repeatable practices. This policy should cover clear rules on credit terms, customer vetting, invoicing, and late payment processes, including risk assessment criteria for new clients and guidelines for the extension of credit. Communicate your policy widely across all departments and train your sales team, not just finance, to ensure everyone understands the importance of timely payment.

Your credit control system should make it as easy as possible for your customers to pay you, so offer various payment methods such as bank transfers, ACH payments, corporate cards, and digital payment platforms. Technology has made it easier than ever for businesses to accept online payments, streamline the process, and boost on-time payments.

Make sure your credit controllers monitor the creditworthiness of your customers regularly, not just new ones. Quarterly reviews of customer P&Ls, balance sheets, and cash flow will give you a real-time risk assessment of their ongoing creditworthiness and alert you to potential problems before they become crises.

A credit controller sits within your finance team and takes responsibility for keeping money flowing into the business. Their core focus is managing the amount of credit extended to each customer and making sure payments arrive on time.

Day-to-day, a credit controller will typically:

• Assess the creditworthiness of new and existing customers
• Set and review credit limits based on risk profile and payment history
• Issue invoices and chase overdue payments proactively
• Resolve invoice disputes and liaise with customers to agree payment plans
• Escalate serious cases to debt recovery or legal action when needed
• Maintain accurate records across the sales ledger

Strong communication skills matter just as much as financial knowledge in this role. A good credit controller builds professional relationships with customers while firmly protecting your business interests.

Sometimes, despite your best efforts at credit control, customers don't honour their obligations, and it's up to you and your team to find a remedy.

Credit controllers can use a staged escalation process to manage debt recovery effectively:

1. One week after the due date: Send a gentle reminder requesting payment within the week.
2. One week after the first letter: Use firmer language, request payment by a set date, and enclose the invoice.
3. Two weeks after the second letter: Consider seeking outside assistance, such as a debt collection agency or your trade credit insurer, and communicate your intentions by email and post.

A credit control letter should not contain idle threats. It's part of your overall credit control process, meant to ensure customers fulfil their payment obligations according to the terms you've both agreed upon.

Outsourced credit control can be a cost-effective option for companies that want to free up time and staff to pursue new opportunities and protect cash flow. It can help you manage the extension of credit to customers while reducing the risk of late payments and bad debt.

Trade credit insurance is a complete solution for outsourced credit control. It covers your receivables due within 12 months against unexpected commercial and political risks (customer bankruptcy, changes to import and export regulations, etc.) so that your cash flow is safeguarded and you avoid bad debt. It includes vetting customers, debt collection and compensation in case of non-payment. For international credit control, local representatives who know the language and cultural background of your clients can reduce misunderstandings and make the process more efficient.