Credit control is essential for any business. Many new and start-up businesses fold due to limited cash resources which could have been avoided if proper credit policies and control were exercised from the beginning. There are four main components which we will discuss briefly in order to ensure that effective credit control is in place when starting up a business. These areas can be revisited by those businesses which are successful and ongoing, as many businesses can be more profitable if these steps are maintained.

These areas are:

1. Deciding what credit, if any, to grant a customer
2. Everyday credit control
3. Debt collections (accounts receivable)
4. Coping with other companies bad habits

1. Credit vetting
Questions need to be asked when vetting a potential customer, even if this company or members of its staff are known to you. By asking questions and checking references, you will indicate to the potential customer that you are serious about credit control.

• Is there a possibility that this customer will go out of business and leave you unpaid?
• Is the environment and economy conducive to extending repayment periods?
• Will payments be delayed by the customer?
• How good is your relationship with the customer when it comes to chasing unpaid invoices?

By making use of a number of packages offered by credit information services (Credit Bureaux), you can get affordable, online credit ratings quickly and use them for real time business decisions. Most Credit Bureaux will provide you with a tailor made solution to your company’s requirements, from limited and basic reports to comprehensive and

detailed credit and payment records. Similar services can be procured via some business support organisations as well.

Ask your client for names and trade references. The downside to this is that some clients will provide you with suppliers whom they know will provide you with a good reference. Many suppliers don’t like to provide this information, or will only provide portion of what you will need to know. It becomes more difficult when the referee is in the same or a similar business as you. Many referee’s want to protect their information. Some information that you will need to get from the referee would be:

• Confirmation of the clients trading name and address
• How long they have dealt with the client
• What credit period they give the client and what is the client’s payment record
• Get the references in writing if possible, if not, make copious notes
• Ask the referee if there is anything else that they feel you need to know
• Thank the supplier

Obtain the clients financial statements. This may be time consuming, but it is vital for your business. Make sure that you or someone in the organisation can interpret these statements.

As a general rule, the longer the reference the more you should worry. It may seem like a waste of time to follow these basic steps, but chasing sales is not always the way to a successful business. Sales and credit control work hand in hand, if you have large sales and no collections, then the business is doomed. Remember, credit control leads to a better cash flow and a more profitable business.

2. Setting Credit limits
In many instances, when starting a new business or expanding your current business, it may not always be possible to deal with blue chip companies and corporates. On each occasion, you need to know how much you are prepared to risk.

Set maximum limits for any client based on references and your own checking. Set a minimum order size for credit accounts. Greed tends to cloud judgements, but we have all seen what this can lead to, especially currently as we see a number of large corporations folding because of the global credit crunch, based largely on greed!

Be prepared to be flexible and watch for warning signs. If a client wants to buy more than you have allowed for the credit limit, obtain cash for the balance. If the client does exceed their limit, review the situation carefully, as this may indicate problems.

The more a client requires, the deeper you should delve, make more checks and obtain as may references as possible. Physically visit the client (in many start up businesses, this is the only way in which to get a foot in the door), but this should be true for many credit controllers and credit managers – get to know your clients. When possible, interact with the sales personnel. Talk to them about the client and look out for any snippets divulged by the sales personnel, positive or negative. Check, check, check – the future of the company relies on it.

3. Your Credit terms
Make sure you have an application form (sales contract) with the credit terms and conditions laid out. (See the application chapter in this book). Make sure your client understands these terms and conditions. One of the basic mistakes made by businessmen and the sales staff is to chase the sale. Many bad debt write-off’s would have been prevented if the correct paper work was in place. OBTAIN A SIGNED COPY OF A CREDIT AGREEMENT (SALES CONTRACT). Make sure that both your company and your client have a signed copy of the agreement (contract) and that when the terms and conditions are updated, so is the paperwork.

Ensure that your credit application (sales contract) includes terms such as the goods being owned by you, after delivery to the client, until they are paid for. Make sure that you include a time period for non-delivery of goods, short delivery or damages, as these are notorious reasons for non-payment, and will help to settle disputes. Check with your insurance provider to establish if the goods are in fact insured whilst on the clients premises.

Offer discounts to your clients for early payments in order to ensure a good cash flow, but ensure that your costing is impeccable. Make sure that you monitor clients who accept early payment terms and then pay late. Settlement rebates for good payers are often more effective than discounts, but make sure that this is offered to good payers and

is based on a percentage of their purchases.

Interest charged on overdue accounts must be in line with the National Credit Act. If interest is charged, check with the national Credit Regulator if you need to register. (This subject is handled in the legislation chapter of this book).

Andrew Corke of Lester Aldridge Fast Track in the United Kingdom states “Customers quickly get to know what your attitude to credit control is. A reputation for brisk efficiency in chasing up overdue payments is an asset that can help a small business avoid many potential problems.”

4. Everyday Credit control
It may seem like so much with so little time, but if the department / business is organised, then you will reap the rewards. Every small point makes for a successful business because of positive controls and a positive cash flow. Every day means just that – EVERY DAY!

Make sure that you invoice immediately. The quicker the invoice is raised, the quicker payment is due. Confirm each delivery, make notes of shortages or damages, if any and confirm payment details as a matter of course.

Keep unpaid invoices in date order. Follow up continuously, from the oldest. Set aside regular time each week to follow up on outstanding invoices prioritising the biggest debt with the oldest invoices and concentrating on clients that may have problems – go with that gut feel. If a client exceeds his credit limit, insist upon payment for the excess before granting further credit.

Make sure that in your follow up visits with your clients, find out those who have not placed orders for a number of months, and try to ascertain why. Is the company in financial difficulties, and if so, do they owe you any monies? If not, are there any changes that you can make to your current terms and conditions that will make it more lucrative for them to continue to buy from them. Remember, a credit controller / manager is also a sales person for the company.

Every month, check the total credit outstanding for the business, and calculate how many days’ sales this represents. A simple example is that in a business with sales of R1, 000.00 per day (annual sales of R 365,000.00), if your total debt outstanding is R 39,000.00, this represents 39 days sales outstanding. If this figure continues to rise, then you are being paid at a slower rate and need to concentrate on your credit control. It is imperative to identify the problem and rectify it.

5. Delayed payments
Clients will try to delay payments at any turn, be it because there are actually problems or because they want to improve their own cash flow at the expense of yours. Make sure that you take the time to call the client close to the payment date and confirm the payment due date and the amount. If only part payment is received, call and confirm

the payment of the balance – and follow up.

Be pro-active; propose payment schemes – post dated cheques (archaic). If, at any time it seems that there will be a problem with payment, STOP ALL credit until further payment is made. This may seem draconian, but it is your business and responsibility. If there is an “enquiry”, insist on full payment excluding the “enquiry”, pending further investigation.

If there is any lapse in payment, don’t jump to conclusions, call the client and ask what the problem may be. Keep all relevant information at hand. If you visit your client and get to know him, this will always be a lot easier. Always note all payment problems that you have with any of your clients. If there are delaying tactics, let them know that you

know what they are doing. Maintain a firm but friendly approach.

Frank Thaxton of the Thames Valley Partners business advisors in the United Kingdom states “Make sure that you understand your customer’s payment systems. Many companies will not pay invoices if you are not established on their payment records or if you do not quote their internal order numbers.”

6. Chasing Debt (Accounts receivable)
The phone is still the best mode of collection – the personal touch. Always be firm but not hostile. Contact any late payers within a week of non payment and ask why there is a delay. Make sure that you record the details of these calls. Send reminders, not only to those that you do call, but also to those that you cannot contact, for whatever reason. As above, know your clients payment dates, and call just before the date to confirm.

Cultivate a contact in the accounts payable office. Build the relationship; it is important, almost as important as a personal visit on a regular basis. Speak to them personally and be reasonable, but persistent, when necessary.

If a client makes an excuse, ask when you can expect to be paid. Note the answer and follow up. Alternatively, suggest other payment options if you have the authority and make sure that these are upheld. If further delays are experienced, then legal action may be accessed. (The steps for this solution are outlined in a later chapter of this book).

Ensure that you are aware of the legalities involved when following up on unpaid debt. (Once again, there is a chapter on legislation in this book). Follow the process that needs to be maintained, letters of demand, interest charges that may be levied etc. Ensure that your client understands the process that you will be following and continue with it accordingly. Often times the threat of legal action will bring about payment by the client, but will sour the relationship. Consider this as much as you would consider offering credit to a new client, weight up the pro’s and con’s, but make sure that you make an

informed decision.

7. Working with big companies
Many corporates or big businesses dictate what the payment terms will be. If you do business with these companies, make sure that you are au fait with their modus operandi.

• Where do the invoices go?
• Does a buyer have to authorise the invoice?
• Where do the statements get sent to?
• When do the statements get sent?
• Call the individual involved and ensure that the statement / invoice has been signed off.
• Contact the accounts department to ensure that it has been received.
• Don’t miss the cut-off date for payment.

These basic guidelines may seem improbable for a business that is starting up, but the importance thereof is utmost. It is a given, a business has more chance of succeeding if the sales and credit departments work together. It is not a necessity, it is essential.

Credit departments are becoming more integrated with the rest of corporate and business structures. The days of credit managers operating in relative isolation from other operational personnel are over for many businesses. Credit departments often work hand-in- hand with sales and other departments to effect a seamless transition from sales order to cash.

The changing and more complex nature of the relationships between credit personnel and their co-workers and customers requires new skill sets and technology. Advances in computer software and Internet technology are allowing credit managers to monitor and work within this more complex relationship network. Real time monitoring of sales and cash payment status can help resolve credit problems and issues such as slow payments, write-offs, deductions and customer disputes. The sooner problems or potential problems are discovered by the proper personnel to address them, the better chance they can be resolved to the benefit of a company’s bottom line and their customers’ satisfaction.

When sales and credit departments work on a cooperative and collaborative basis it can help increase sales volume and well as cash flow to a company. While sales personnel want to write as many sales contracts as possible, it doesn’t help the company if payments are not made on those accounts. By working together, sales and credit departments can get sales for their company that are more likely to work successfully through their evolution from sales to cash.

The Credit Manager / Controller administers their department in conjunction with the company’s policies and procedures; their goals and objectives as well as operating within the many acts of legislation which governs the fair granting of credit whilst conforming to a code of conduct and ethical standards. They must choose between short term gains and long term objectives. As in marketing, credit management “must represent those integrated activities which direct the development and flow of products and services from the enterprise to the consumer in such a way that the primary objective of the enterprise is accomplished and the needs of the consumer are satisfied”. (McCarthy, J.E., Basic Marketing, A Managerial Approach, R.D. Irwin 1978).

The Credit Manager becomes a facilitator between the company and its target market which will include:

• Having a clear vision and a clear set of values
• Maintaining policies and procedures
• A focus on the customer and their needs
• Ensuring that all activities of the enterprise are co-ordinated and integrated
• Ensuring that efficiency and profit objectives are achieved at all times
• Maintaining staff satisfaction by nurturing and guiding
• Reporting and analyzing

The Credit Manager is constantly involved in planning, leading, organising and controlling; balancing customer satisfaction with the cash flow requirements of the company.

Credit is far more involved than simply approving of credit transactions and the achieving of collections. Credit includes sales, finance, sales policies as well as financial policies. It also includes a good understanding of the legislation which governs business. It also involves the strategic planning by top management and credit management in determining the levels of accountability and responsibility. The liquidity and profitability of any enterprise is always the main objective of top management. To this end, the achievements of these goals are shared amongst a number of functionaries in the business.

The responsibility of the credit department is to ensure that all the debts are collected timeously, failing which, the enterprise will not generate the anticipated profits and will not be able to service its debts. It is also the responsibility of the credit department to ensure that sales on credit are being maximised, as the more profitable sales an enterprise can achieve, the greater its potential profits will be. Within the parameters set by the enterprise, the credit department must adopt policies and procedures with regard to credit granting, credit limits and collections that will enable the business to meet its obligations and achieve its profits. These policies; standards of credit granting and collection management will determine the volume of business transacted.

In doing so, the credit department must:

• Maintain credit policies and procedures
• Work in harmony with the sales department, identifying sound business prospects
• Control the costs of credit services and collections
• Control and minimise the risk of the debtors to the best advantage of the business
• Focus on rehabilitating poor credit risks
• Submission of operational credit reports
• Analyse the economic environment continuously, and be aware of the external variables

8. Responsibilities and Objectives of the Credit Manager

The importance of the credit manager has increased over recent years, and with the growing acceptance of the use of credit in our economy, it will continue to do so. In order to adequately plan the departments objectives, the credit manager must firstly and foremost understand the responsibilities that their position carries.

It is the credit managers responsibility to ensure that credit is not overextended, nor that it is restricted to the extent of hindering potentially profitable sales. How credit is managed in the company has a direct impact on other departments of the business, such as finance,

sales and marketing.

The credit manager has responsibilities both internally (within the company) and externally. They involve:

• To senior management: Contributing to the achievement of company profit objectives through effective risk management

• To the credit department: To plan, organise, lead and control all aspects of the credit function in a manner that encourages staff development, whilst maintaining sound credit principles that result in a positive contribution to company profits

• To the debtor and potential customer: To offer exceptional customer care whilst ensuring that debtors are not overtraded or unnecessarily restricted, thereby promoting loyal customers who contribute to company profits

• To the sales department: To contribute on a regular basis in order to provide and obtain relevant information that will assist with promoting profitable sales, thereby encouraging all personnel to function as one team within the company

• To the operations department:

• To the external credit industry: To communicate and meet the credit personnel from other companies and industries, thereby obtaining valuable knowledge, information and experience which will add value to the performance of the credit department.

In the execution of their duties, credit managers should take the following into consideration:

Planning: This is the function that determines the objectives, identifies ways of achieving goals and examines the resources needed for the task. Effective planning includes the following elements:

• Interpreting goals, which are passed down as a result of planning at higher levels

• Transforming organisational needs into team goals and objectives

• Formulating implementation plans by examining alternatives and selecting activities, which leads to successful results

• Identifying resources needed to achieve goals

• Establish standards of performance and how results will be measured

Organising: For plans to be implemented and executed, one must perform the necessary tasks to attain set objectives. Key aspects of organisation include:

• Divide the work into logistical tasks and groupings

• Establish guidelines in order to co-ordinate activities

• Design information systems which give appropriate feedback as work progresses

• Establish communications networks

• Involve the team

Leading: Credit managers are expected to lead their teams in achieving their goals, and need to monitor progress and install corrective measures where necessary. Leadership involves:

• Establishing of direction

• Motivating people to get there

In order to motivate, the credit manager should be proficient in:

• Ensuring that the staff know what is expected of them and how their performance will be measured

• Provide the staff with the resources to do the job

• Provide a comfortable working environment

• Guiding and encouraging personal development Providing skills based training

• Recognising and rewarding good performance

• Correcting and eliminating poor performance

• Respecting the employee and their ideas

• Ensuring all employees are treated fairly and equally

• Ensuring the employees are set good examples through management behaviour

Control: As with any form of management, the credit manager must always keep the game plan in mind, adjusting the play as and when needed to keep their team focused and on target. It is necessary to establish a control system that will achieve the goals as set out. Once the control system is in place, the manager can compare what is happening with what is expected.

The function of control involves:

• Assessing
• Comparing results
• Critical Analysis
• Accountability
• Corrective Action

It is imperative when selecting individuals to staff the credit department, that these individuals have the required skills, an aptitude for finance and administration, the ability to adapt to continuously changing environment as well as the ability to interact with other individuals in other departments of the business.

This book will cover all the topics and information required to make this important area of the business tick smoothly. It will serve as a reference guide where more detailed information is required and will assist top management in making effective and efficient decisions that are vital to the success of the organisation.