Credit Control System: Setting up

Mismanagement of cash flow is the single biggest reason that small businesses go under. Therefore, a good credit control system is an essential part of any business’ accounting procedures. Maintaining consistent cash flow, avoiding bad debt and minimising late payments are essential for survival.

Use the following checklist to set up a credit control system.

Things to do

1. Set up a detailed credit control system

It must allow you to identify invoices that have been raised, sent to customers or paid. You must also be able to see which invoices need chasing up. Each customer must have a file with details such as:

  • business name;
  • business address;
  • postal address for invoices;
  • and a contact name and number for invoice enquiries.

Train several people on your new credit control system and test it thoroughly.

2. Credit-check your customers

To do this, you can approach their bank for a reference; use a credit reference agency; or ask their other suppliers. Establish how solvent the customer is and whether they are likely to have any problems paying their invoices on time.

3. Decide on your general payment terms

Most importantly, decide on a payment date. Bear in mind that new customers should only be given a short time in which to pay. Go through the terms with each customer and print them clearly on each invoice.

4. Send invoices promptly

Try to send all of them out the same day as goods are sent or delivered. Make sure the invoice is sent to the correctly named and titled person, at the right address.

5. Start an automatic reminder procedure

Flag invoices that are due and send out reminders, or better still phone, to chase up payment.

6. Appoint a ‘debts czar’

This should be a trusted employee in charge of following up bad debts. They should keep a record of all calls and letters made. Remember you can charge interest under the Late Payment of Commercial Debts legislation.

7. Follow up invoices before their due date

Pay particular attention to larger invoices. Your ‘debts czar’ should know the ‘invoice person’ in every customer’s business (especially the Purchasing and Finance Departments) and be able to answer the following questions at any time:

  • Has the customer received the invoice?
  • Where is it in the customer’s authorisation process?
  • Who needs to approve the invoice for payment?
  • Have they done so?
  • When is the invoice scheduled to be paid?
  • How will payment be made?
  • If a cheque has to be raised, who has to sign it?

8. Have a stop list for late-paying customers

Circulate this list to all appropriate employees to prevent further credit or goods being supplied. Inform the late payer that they are on the list.

9. Organise a sufficient overdraft

You should have enough overdraft to cover the worst possible periods of cash flow. Alternatively, consider using a factoring agent who will pay you a percentage of invoices’ worth as soon as you raise them, in return for a small commission.

Best practice

  • Educate yourself/your staff with credit control training.
  • Employ the services of a credit management consultant at least once every three years to see if there are improvements you can make.
  • Keep talking to debtors. Don’t lose your temper with them, but make it clear you are prepared to take legal action if they do not settle the invoice.
  • Ask your accountant to suggest improvements to your credit control system. Is your ‘performance indicator’ for credit control better than other businesses in the same sector?

This “Setting Up a Credit Control System” business advice article based on Crown Copyright 2003-2012

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