Cash flow is a lifeline of any business and it will be affected adversely if you have not devised a plan for controlling credit. Your debt will eventually turn into bad debt which will increase the amount of interest, marginalize profits, and, eventually, may lead to business closure. Yet, in many businesses, credit is the fact of the matter and, by denying credit, you lose potential customers. By following a few unpretentious measures, you can keep track of your credit, which will also lower the risk of uncollected payments.
If you are in manufacturing, wholesale, service or retail business, and it is indispensable to offer your customers credit, there must be a policy in place to limit credit losses.
Steps to Controlling Credit
Research the Client
Before you give away credit to any client, you must do your research to ensure that they a good reputation. Ask the client to fill out a credit application. The application highlights key information about the client including the amount of required credit, who can access credit, credit arbitrator, and other germane information. All of this information should then be assessed according to controlling credit policies and the decision should be made whether to approve or reject the credit request.
Approve and Invoice Promptly
Once credit has been approved for a client, you should not wait. Generate your invoices promptly along with a credit approval letter. The letter should state all terms and conditions including due dates, interest, credit amount, and all of the other main details. In order to ensure prompt payments, this is an important step as the client must know these key details in advance.
Maintain Updated Records
One of the recipes for efficient credit management is to preserve precise and current records. An aging of debtors that includes the time it will take to pay off the debt should be available at all times. If a client has been given a special consideration in return for early payments, they must be kept separate for future reference. The way you perform your bookkeeping functions will have a significant impact on the management of your records. Therefore, always use professional services if you are in doubt about your ability to keep everything updated.
When you are running a business, it is probable that some of your credit offerings will default as you are trading with a diversity of clients. Don’t panic, as this is normal in businesses that deal in credit. Nevertheless, you are still required to formulate a policy that will accommodate all concerns related to outstanding payments. Typically, a phone call to your client will solve the issue. However, if that doesn’t work, you need to have a backup plan. Just like offering discounts for early payments, late payments should be met with fines or penalties so that the borrower will make a real effort to make the payment on time. Controlling credit requires you to set your penalties at an optimum level so that it does not result in lost customers or money.
Talk to the Right People
Every business has certain people who are responsible for making decisions and are in charge of setting the direction. When dealing with other businesses, ensure that you are in contact with the right person as others might not have authority. You may end up making a credit deal with a low-level employee who doesn’t have much say in the decision making. One way to avoid such scenarios is by holding at least one face to face meeting with the client so that you are certain about who you are dealing with. In fact, this should be a part of your controlling credit policy to ensure that credit is only offered to the people in charge.
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