Free Guide - How To Do Your Own Credit Control

This is the credit control guide which will be useful reading for anyone contemplating undertaking their own invoice collection activity. It could also be referred to as a guide to receivables management or how to manage your receivables.

A free guide about how to do your own credit control.

Credit control is an essential function within all businesses that want to offer credit terms to customers. This is a free credit control guide about how to do your own credit control. We thought it would help to produce this free guide, with everything you need to know about how to do your own credit control, all in one place.

If you need help with credit control please: CONTACT US or call Sean on 03330 113622 to discuss in confidence.

The Credit Control Guide

Starting with a definition.

Definition - What Is Credit Control?

There are variations in the definition. but we define it as follows:

"Credit control is the process of ensuring that a business only gives credit to customers that are able to pay, and ensuring that outstanding sales invoices are paid on time."

So there are two parts to effective credit control:

  • Controlling the amount of credit extended to your customers e.g. setting customer credit limits.
  • Ensuring that outstanding credit invoices are paid on time by your customers e.g. chasing procedures and collecting unpaid invoices.

Sounds easy, but in practice, there is a great deal of technique and knowledge that goes into successfully managing the credit assessment and payment collection processes.

Basics Of Good Credit Control

You can avoid the problem of undertaking your own credit control in one of two ways:

  1. Don't offer any credit - it is stating the obvious but there is no right to get credit. However, there is often commercial pressure to offer credit.
  2. Non-recourse factoring - you can get bad debt protection providing you stick to limits set by the factoring company and they will undertake the invoice chasing and collection for you. Not all facilities are the same, not all offer 100% protection, and in some cases, there will be a first loss clause in respect of any claim (a credit insurance policy may also offer protection).

Assuming that you want to run your credit control function yourself, the following articles provide guidance about good credit management:

Credit control and invoice collections free guide

Set Cash Collection Targets

Whether you handle your credit control function yourself, via staff or through the use of a factoring company, setting a target for the amount of cash that should be collected from outstanding invoices each month gives the credit controllers, that are involved with the task, something to aim for.

This can be particularly effective if they receive some form of reward for meeting or exceeding their target. These rewards do not necessarily have to have a financial impact of your business. For example, you could offer your credit controllers time off, instead of a financial reward, for a good performance against their cash collection target.

    Credit Controllers

    A "credit controller" is a member of staff dedicated to the function of undertaking credit control. These may be part-time, full time or the function may be undertaken by the owners or directors of a small business. An issue that we commonly come across is that the principals of a business feel that undertaking this function themselves, takes up time and often distracts them from other important tasks, such as seeking new sales.

    However, employing a credit controller, to undertake this task, can be expensive. Information from payscale.com suggests that at the time of writing, the average base salary of a credit controller, within the UK, was £24,325 within a range from £19K to £31K. The cost is affected by the experience and location of the job, with London attracting a premium.

    The other alternative option to employing credit controllers is to outsource the credit control function.

    Credit Control Process and Procedures

    The first step is to set reasonable credit account limits for customers. This is the total amount of invoices that you will allow to be outstanding to a customer at any given time. This can be set according to factors such as:

    • The financial position of the company - is often evidenced in financial accounts filed at Companies House, and management accounts (less reliable but maybe more up-to-date).

    • Credit information - there are numerous credit information systems that can suggest limits and provide other information, in addition to analysis of financials, such as court judgements, payment performance and other related credit information.

    • Payment history - your own payment experience of the customer, or the experience of other people. Trade references (from other suppliers) can also form part of this.

    For more details about how to credit check a customer that you wish to offer trade credit, please see our related article: How To Credit Check Customers. It explains the sources of information and the process that you can follow to better understand the credit profile of your customers. Please note that this is not a guarantee that you won't take a bad debt.

    See our related article: How I Analyse Financial Accounts and Information. This explains how I review and analyse a company's financial accounts (profit and loss account and balance sheet) in order to help determine the financial position of the business. This can be an important part of granting credit.

    Credit Control Systems

    Any credit control system needs a system of regular contact with the debtor. Often telephone calls can be the most effective approach but sending chasing letters and statements can also help. It may not be cost-effective to phone smaller accounts so you may choose to operate a paper or email-based chasing system for smaller accounts. Chasing correspondence can be sent by post but you may find that emails are cheaper, more effective and may provide some tracking information e.g. read receipts. Note that there may be legal requirements to be able to show that you have served certain notices on customers.

    Automated collections systems may offer you the option of automating the production of correspondence but smaller organisations may choose to develop their own manual approach. There are many credit control systems available that will help you automate much of the invoice-chasing process.

    How to raise invoices and credit notes - examples and templates.

    Tip To Improve Your Debt Turn

    One tip that might knock a few days off of your debt turn is to email your invoices, rather than relying on the post. Make sure that you get an acknowledgement of receipt though, as you don't want to find out the invoices weren't received when you finally start your telephone dunning procedures.

    See our related article for more: Credit Control Tips.

    Chasing Calls & Payment Promises

    Find out, when you take an order and set up a new customer account, who you should call about payment of invoices. Often there will be an accounts department in larger businesses but a named contact and a direct dial number often help.

    Payment Cycles

    Many organisations operate on a set payment cycle. This means that they will pay at a given point following receipt of your invoice, or after taking a given period of credit. This is important to know as you can time your invoices and chase them to maximum effect. If your customer pays 30 days after receiving your invoice, your incentive is to get your invoices raised quickly. Some firms only have accounts staff working on certain days. Try to find out what approach they take and tailor your approach accordingly.

    Chasing Notes

    Following any chasing phone calls, you should make notes of any conversations that you have with customers, recording the date and time, the name of the person you spoke to and the details of the conversation. The purpose should always be to elicit a payment promise from the customer, including an agreed date by which you will receive payment.

    Tone Of Voice

    OK, you need to be assertive when you make such calls and it's all about religiously following up on payment promises & overcoming excuses. However, if you can build a rapport with the people that you are chasing it is likely to bring you no end of benefits. People like helping people they like - "liking" someone is one of the 6 principles of influencing people, so it is worth investing in trying to develop some kind of rapport with the people who pay your invoices.

    Credit Control Timetable

    You should develop a credit control process (timetable) that suits your organisation and reflects your relationships with your customers. This will vary between organisations. We work with a number of finance houses and they pay very quickly without the need for any chasing in most cases. However, other industries can be very different. Similarly, some organisations will have set processes for paying invoices, for example, payments are always made 30 days after the invoice date regardless of the terms. In such cases you will need to adapt your chasing cycle to account for the customer's normal behaviour, providing you are prepared to accept this.

    You can consider "pre-dunning", which is making contact before the invoice falls due, in order to ensure that it is paid on time. This could be a call or a statement sent out a few days before the due date.

    The chasing cycle that you use needs to be your own design, reflecting your risk appetite and your relationships with your customers. This is an example of how you might structure such a process, but you should tailor this to your own requirements. This might be considered quite a strict cycle by some, and not strict enough by others!:

    • 7 days before the due date - pre-dunning - contact the customer by phone (or email) to check that your invoice(s) is going to be paid on time (or agree on a payment date). Alternatively, you might just send a statement. This is an example of a debtor statement of account so that you can see the format that might be used.
    • 1 day overdue - send the first chasing letter, by email or post.
    • 7 days overdue send the second chasing letter.
    • 14 days overdue send the third chasing letter. You may also want to consider putting the account on your stoplist around this time. A stoplist contains the businesses that are to receive no further supply until they pay the outstanding debt.
    • 21 days overdue send the final demand letter.

    Depending on the resource that you have available, you may choose to add collections calls at any of these points, possibly a couple of days after sending correspondence, when you can refer to the recent letter. Phone calls are most likely to result in a payment promise from the debtor. If a promise is received, and you are prepared to accept it, you will need to adapt your chasing cycle accordingly.

    The key to a good credit control process is to continue to follow up diligently. If the customer is away, find out when they return and call again, if they say they will pay in 3 days, call back 3 days later to confirm the payment has been made. This diligence will maximise your chances of getting paid.

      Chasing Letters

      These are some examples of possible invoice-chasing letter templates that you could use, or adapt, for UK debtors:

      Using Social Media

      It might sound like a good idea to use social media to chase payments but in practice, it has some serious risks which are explained in our blog post about using social media to chase invoices.

      Handling Common Payment Excuses

      These are some common payment excuses, together with possible responses: How To Handle Late Payment Excuses.

        Outsourcing Credit Control

        There are numerous providers that can supply a professional credit control service, this can often be much cheaper than hiring your own staff. In some cases, they can do this in the name of your business so your customers are completely unaware that you are even using the service. To your customers, it appears that you have your own credit control department.

        Full information, and price examples, for outsourcing can be found here: Credit Control Outsourcing.

        Case study about using an outsourced service.

        Bridging The Credit Gap Until You Get Paid

        Even if customers pay to terms, you may still have to wait at least a month to get paid (depending on the terms that you offer). You can bridge that credit gap using invoice finance which will release most of the cash from an unpaid invoice immediately. Request an invoice finance quote.

        Credit Control Systems

        There are many credit control systems that can often be integrated with your accounting software. Many of these systems provide comprehensive credit control systems that will guide you through every step and automate tasks such as sending and chasing emails.

        Bad Debt Protection And Debt Collection

        If you end up with one or more invoices past their payment terms, and it seems like the customer is not going to pay, there are services to help you: Debt Collection. To avoid the problem occurring, you can protect against the risk of non-payment of sales invoices with Bad Debt Protection.

        See our post that includes a list of ideas to mitigate the risk of customers defaulting on payments.

        Statutory Late Payment Interest & Fees

        Here you can find government guidance about statutory late payment interest: Late Commercial Payment Statutory Interest. You may also be able to claim a late payment fee: Late Payment Fees.

        Statutory Demands

        The government have also provided guidance on the production of a statutory demand, which can be issued by your business prior to taking legal action. Their advice includes a statutory demand template: Statutory Demand Guidance.

        Related Resources

        Important Notice: This guide is provided as general guidance only about credit control and does not constitute legal advice. Legal advice should be sought about your particular circumstances.

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        Examples of funders we work with:

        pennyfreedom
        inksmoor
        ifg
        leumi abl
        giant finance
        nucleus