Credit Control

Published Apr 7, 2024

Definition of Credit Control

Credit control is a critical business practice that involves managing and controlling credit policies that govern a company’s extension of credit to its customers. It is a strategic tool used by firms to ensure they maintain sufficient cash flow, minimize bad debts and avoid overextending credit to high-risk customers. The purpose of credit control is to balance the benefits of higher sales through credit extension against the risk of incurring bad debts, thus optimizing a company’s financial health and profitability.

Example

Consider a retail electronic store that sells high-value items like laptops and smartphones on credit. To implement effective credit control, the store sets a credit limit for each customer based on their credit history and current financial status. This limit determines how much a customer can purchase on credit. The store also establishes a clear policy for payment terms, such as requiring payments within 30 days of purchase.

For new customers with no prior purchase history, the store might require a down payment or shorter payment terms until a trustful transaction history is established. The store regularly reviews the credit status and history of its ongoing customers, adjusting credit limits and terms as necessary to manage risk and enhance cash flow. In cases where customers fail to meet their payment obligations on time, the store may take actions such as sending reminders, imposing late payment fees, or restricting further credit until outstanding debts are settled.

Why Credit Control Matters

Effective credit control is essential for the financial stability of any business that offers credit. It helps in minimizing the risk of bad debts, which can significantly impact cash flow and profitability. By carefully assessing the creditworthiness of customers before extending credit, a business can reduce financial losses. Moreover, robust credit control practices improve cash flow management, ensuring that receivables are collected promptly and that there is enough liquidity to cover operational costs.

Furthermore, credit control contributes to building strong customer relationships. By setting clear credit terms and communicating them effectively, businesses can avoid misunderstandings and disputes over payments. This transparency helps in fostering trust and loyalty among customers.

Frequently Asked Questions (FAQ)

What are some common credit control techniques?

Common credit control techniques include setting credit limits based on customer creditworthiness, conducting regular credit checks, establishing clear credit terms and payment conditions, sending timely and accurate invoices, issuing payment reminders, and taking action on overdue accounts. Additionally, offering incentives for early payment and maintaining open lines of communication with customers can also be effective.

How does technology impact credit control?

Technology has significantly impacted credit control through the introduction of credit management software that automates many aspects of the process. This software can help in assessing credit risk, setting credit limits, monitoring outstanding balances, and sending automated payment reminders. It improves efficiency, reduces the likelihood of human error, and allows for real-time credit management decisions.

Can a business be too strict with its credit control policies?

Yes, overly strict credit control policies can sometimes be counterproductive by discouraging potential sales and damaging customer relationships. It’s crucial for a business to strike the right balance between managing credit risk and fostering sales growth. This involves setting reasonable credit limits and payment terms that align with the customer’s ability to pay while protecting the business’s interests. Flexibility and communication are key to achieving this balance.