An effective credit control system follows a clear lifecycle.
Step 1: Establish a Clear Credit Policy
This is the foundation. Your policy, established in your contracts and terms, should be unambiguous.
- Define Payment Terms: Clearly state due dates (e.g., Net 30), accepted payment methods, and any discounts for early payment or penalties for late payment.
- Contract Management: Ensure your terms and conditions are reviewed by a lawyer with trade experience. Crucially, have the contract signed before work begins or goods are delivered. Printing terms on the back of an invoice is often not legally sufficient.
- Set Credit Limits: Determine the maximum amount of credit you are willing to extend to any single customer based on their risk profile.
Step 2: Assess Customer Creditworthiness
Before offering credit, you must know who you are dealing with. This applies to new and existing customers.
- Thorough Research: Don't just rely on a good personal relationship. Use multiple sources for your customer credit analysis:
- Official sources like the local Chamber of Commerce.
- Business credit bureaus.
- Bank and trade references.
- Financial Health Check: If possible, review their financial statements. A customer’s willingness to share this data is often a good sign. When they won't, a credit insurer can often access this information confidentially on your behalf.
- Periodic Reviews: Don't assume a good customer will stay that way. Review the creditworthiness of all major clients periodically, especially if their payment behavior changes.
Step 3: Proactive Monitoring of Accounts Receivable
Good control means being proactive, not reactive.
- Efficient Invoicing: Invoice immediately after delivery. Ensure all necessary details are correct (customer name, address, PO number, price, bank details) to avoid administrative delays.
- Confirm Receipt: A quick call or email to confirm the invoice was received and is correct can prevent future problems and serves as good customer service.
- Track Your DSO: Monitor your Days Sales Outstanding (the average number of days invoices go unpaid). A rising DSO is an early warning sign that your credit control needs attention.
Step 4: Implement a Structured Collections Procedure
When an invoice becomes overdue, you need a clear, escalating process.
- Initial Reminder: As soon as payment is late, a polite phone call or email reminder is the first step.
- Follow-Up Communication: If payment is still not received, send a more formal written reminder, referencing the initial contact.
- Final Notice: If the delay continues, send a formal notice setting a final deadline and stating the consequences of non-payment (e.g., legal action, involvement of a collection agency).
- Stay Professional: Be assertive but polite. Involving account managers can help preserve the customer relationship during contentious discussions.
