How to build a simple and effective credit control policy

As any business owner knows, the availability and reliability of cash flow impacts the future success of trading in both the short and long term. With this in mind, mastering a good credit control practice within your business would ensure the consequences or late payment are evaded where possible.

Amongst the many different credit management strategies that businesses are using and considering implementing, a written credit policy should be the backbone, providing continuity and best practice throughout all financial business aspects.

As an agency experienced in credit control, taking care of many clients’ sales ledgers and ensuring their customers pay within terms, we would like to share with you our best practice procedures for a great credit control policy.

Firstly, what is a credit policy?

A credit policy is essentially a set of rules that dictate the procedures that staff should follow when trading on credit terms. It ensures a co-ordinated approach to credit control across the company and will be based on past experiences and best practice, so that it’s as relevant to your business as possible.

In truth, credit policies will vary considerably from business to business. Ranging from a few small paragraphs to several pages that are aimed at either the credit control department or the whole business, both formats can be argued both for and against. The important thing is to get it right for your business.

What are the key benefits?

Biggest of all is that a credit policy will ensure a consistent approach to credit management from every staff member and across each customer. It means that every customer will be offered the most appropriate credit terms and contacted at the right times, whilst ensuring that the credit control team understands what action to take at different stages of the order-to-collections process.

This helps to increase efficiency within the department as staff can get on with their jobs rather than seeking the opinions and approval of other team members and managers. It also removes bias, brings continuity when new staff are recruited and forms a key part of the training collateral.

Whereas some company policies can be regarded as rigid, inflexible structures, however, credit policies can be much more fluid and evolve continuously according to new experiences, trends and industry developments. The end result will be that customers will pay faster and your business’s cash flow will be improved.

To combat late payment, too often we are seeing businesses only react when it’s too late. By taking the necessary steps up front, a more proactive approach can put your business back in control.

How to write a simple, yet effective credit control policy

Roles and responsibilities

A brief description of the delegation of responsibilities for the department / role, including authorisation and decision makers. Ensuring nothing is left to assumption is good practice here.

Communication and procedures 

The backbone of your credit procedure should be the basic do’s and don’ts of your policy. Although it goes without saying, writing this down as an official policy will minimise error from staff conducting and nurturing credit arrangements. It should outline the different avenues of communication between the business and customers that to be used and at which points during the credit cycle.

Choose a reliable credit information partner

Finding an accurate provider that will be able to offer the insight and intelligence you need to make smarter credit decisions will benefit your process by speeding it up and enabling you to make confident choices, based on fact. Consider where to buy credit reports on new and existing customers and ensure you are benefiting from the best deal from that provider.

Existing customers

Re-evaluating the credit histories of existing customers frequently will ensure you keep on top of any potential problems, as their own financial position could change at any point.

Bear the business’s goals in mind

Based on company cash flow requirements, these will fluctuate according to the general economic situation and financial requirements of the business. Decisions made by the credit control function, such as the length of credit terms offered to customers, should be based on the overall business’s cash flow requirements.

Terms and Conditions

These are vital when protecting your business, as inevitably, things can go wrong. Including your terms and conditions on all sale documents, with a statement requiring a signature, will ensure you are not caught out. 

Invoicing 

Ensuring all invoices follow a template, include all necessary information and are issued within 24 hours will ensure all grounds are covered when it comes to late payment, as excuses will be difficult to come by. 

Collections

Even with all your best efforts in managing and upholding a rigid credit policy, there will be occasions where some customers still will not pay on time. Knowing there is a plan in place for such eventualities will take the stress off staff by allowing them to follow a strict process, which should initially begin before the amount is due as a reminder, eventually escalating into letter, phone calls or perhaps utilising a specialist collection agency to operate on the business’s behalf.

Evaluating

Every great credit control policy would not be complete without regular evaluation, ensuring the desired actions are being upheld and are effective in preventing the burden of late payment to the business. If all efforts are ineffective, considering outsourcing this function could considerably reduce demand from staff and improve overall productivity throughout the business.

We hope this quick guide will help you to build a simple yet effective credit control policy that can navigate the problem of late payment and ensure cash flow does not cause a problem when it comes to business growth.