Best Practice Credit Control – the Fundamentals | proCFO

Best Practice Credit Control by David Officen, proCFO

Would a traditional money lender such as a bank grant a loan to someone without a repayment contract in place?  No one reasonably expects to get a loan without having to provide some guarantee of repayment.  Yet, most businesses who provide goods or services on credit do not have a sound agreement to ensure payment.  This is crazy!  Companies who do follow best practice in credit control dramatically increase the likelihood of cash flow problems and high levels of bad debt that could compromise their survival.

Credit Control: First things first – the account application.

The key to avoiding business losses from bad debts is to establish strict guidelines for how and when to approve credit for a new customer.  The best credit policies start with a written credit application.  This is an agreement which outlines the terms and conditions upon which you will offer your new customer credit.  Do not be shy about requiring customers to do this.  It may be customary in your industry to operate credit accounts.  But that does not mean everybody is automatically entitled to unlimited free credit from you!  It is this document that you will need to rely upon if you are in a situation where legal action is needed to recover a debt.

As a minimum:

Your credit application form needs to show the correct customer name, their ABN, the physical location and an address for sending invoices.  It should also state what the maximum credit limit is.  Will interest penalties apply to overdue amounts and at what interest rate?  Will any additional debt collection costs be recoverable from the customer?

It should also require your customer to provide at least four trade credit references.  Including a statement granting you permission to seek information from the references and credit reporting agencies.  These references should be primary suppliers to the business, not the local café where they have an account for occasional lunch catering.

Lastly, it should also include some form of personal guarantee.  Without this, the debt is effectively unsecured with no leverage to enforce collectability.

The next step: approving a credit account.

The first thing to do is to verify the applicant’s details.  If your new customer is a Pty Ltd company, you can search the Australian Securities & Investments Commission (ASIC) free online register and confirm basic details (https://connectonline.asic.gov.au).

For a small fee, you can download full details of officeholders, addresses, shareholders etc.  Another handy search to do is of the Australian Business Register online (http://abr.business.gov.au/).  This search will confirm the entity name, their ABN and details of any registered business names.

Credit checks

Once you have confirmed the applicant details it is important to contact all the listed credit references.  Your new customer is unlikely to list any supplier they have a poor trading history so it is important in your reference checking to ask for some specific details.  Informing the person, in a friendly way, that you will be noting down their name and answers should provide an element of accountability for their responses and hopefully illicit greater honesty.

Ask them to confirm the following:

  1.  Is the account currently within their trading terms?
  2.  Is it regularly maintained within credit terms?
  3.  If not, when do they usually pay – 30 days after the due date? 45 days…?
  4.  What is the normal monthly spend?
  5.  When was the last sale?
  6.  How long have they been a customer?

Credit Control basics – check them out.

Another option to verify the creditworthiness of a new customer is to order a credit report from one of the three main Credit Reporting Agencies in Australia.  These are Veda Advantage, Dun and Bradstreet and the Tasmanian Collection Service.  The fee for these reports can be up to a few hundred dollars.  But they will indicate any outstanding debts recorded or adverse records such as a court judgement or writ.

If, after all this investigation, you still have doubt about the customer’s ability to pay then it may be best to defer granting a credit limit.  Require them to pay C.O.D. until they have established a good trading record.  If this news is a ‘deal-breaker’ for your new customer, then perhaps there is justification in your concern?

The granting of a credit account should not be left to a junior administration person.  With good scripts for conducting reference checks, a junior admin person can do the ‘leg’ work.  But the ultimate decision should be made by the business owner.

Invoice promptly and make it super easy for customers to pay you.

Ensure you invoice your customers as soon as you’ve supplied goods or services.  Any delay in invoicing sends the wrong message.  Tardy invoicing means they’re allowed to be tardy in paying.

Don’t give customers any reason not to pay you.  Providing options such as credit card and PayPal as well as direct bank credit increases the likelihood of getting paid ahead of others.  Offer to collect a cheque from their offices if it helps.

Best Practice Credit Control: Diligently pursue all outstanding accounts.

The best credit application and approval process will be worthless if you do not chase overdue amounts.  Develop a process and follow it diligently.  Credit control is best handled by one person.  And preferably not the same person responsible for making the sale.

Credit Control Steps.

The first step in your credit control procedure should be to call your customers immediately a debt becomes overdue.  The tone of the call should be friendly with the purpose being to confirm that the customer has received the invoice.  Then ask “when will it be paid”?  Use this opportunity to remind the customer of your credit terms and get the customer to make a firm commitment to pay.  Successful credit control is all about consistency and it is well documented that the key to getting paid faster is to keep in constant contact with your debtors.

If you’ve exhausted all steps in your credit control procedure and the customer is still refusing to pay it may be time to put the account on ‘stop credit’  and refer the debt to external your collection agency.  Taking this action may seem drastic but it will very quickly determine whether the customer does have the money to pay or they have merely been “stringing you along”.

About David Officen

david-officen-photoDavid is the Founder and Managing Director of proCFO.
David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.

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