Credit Control
Credit control refers to the set of policies and procedures businesses use to manage how customers pay for goods or services on credit. Essentially, it is about deciding who receives credit, on what terms, and ensuring payment is collected on time. For UK firms, effective credit control can mean the difference between smooth cash flow and financial strain. Did you know that maintaining strong credit control reduces late payments and lowers the risk of bad debts for small businesses?
What is Credit Control?
Credit control is a financial process that businesses implement to vet prospective customers, set credit terms, and monitor outstanding invoices. For instance, a wholesale stationery supplier might grant a retailer 30 days to pay after delivery. The supplier records the transaction as accounts receivable and expects payment within the agreed timeframe. If the retailer fails to pay on time, the credit control team follows up, possibly imposing credit limits or withholding future sales until payment is settled.
How Credit Control Works in Practice
The credit control process begins with evaluating customers' creditworthiness, often by checking their credit rating and requesting trade references. Once approved, the business sets clear credit limits and payment terms. Throughout the relationship, the company monitors the age and status of outstanding debts, regularly sending reminders before payment is due. If debts remain unpaid, escalation procedures, such as involving collection agencies or tightening credit, are implemented.
Real-World Example of Credit Control
Suppose a printing company has three major clients, each with a £10,000 monthly credit limit. One client starts paying invoices 20 days late. The company reviews the client’s payment trend, communicates reminders, and, after repeated delays, reduces the client’s credit limit to £5,000. This practical approach demonstrates how active credit monitoring and follow-up helps maintain a manageable risk profile.
Calculation Example: Days Sales Outstanding (DSO)
Credit control performance is often measured by calculating the Days Sales Outstanding (DSO), which shows the average number of days it takes to collect payment after a sale. Here’s a practical example:
Formula: DSO = (Accounts Receivable / Total Credit Sales) x Number of Days
Suppose a business has £45,000 in accounts receivable at month-end and made £90,000 in credit sales during the 30-day month. The DSO calculation is:
DSO = (£45,000 / £90,000) x 30 = 0.5 x 30 = 15 days
This result means the business collects payment on average every 15 days, indicating effective credit control. A higher DSO suggests slower collection, which could signal problems in the credit control process.
Pros and Cons of Credit Control
Strong credit control allows businesses to safeguard their cash flow, reduce the likelihood of bad debts, and build dependable customer relationships. It offers opportunities for businesses to extend credit as a competitive advantage, attracting new clients and strengthening existing partnerships. However, strict credit control may slow sales growth, as not all customers will qualify for credit, and some might be discouraged by tighter payment terms. Also, maintaining a robust credit control system can be resource-intensive, requiring investment in staff, software, and ongoing monitoring. Finding the right balance between risk and opportunity is crucial for businesses seeking both growth and financial stability.
Historical Background of Credit Control
The concept of credit control dates back to early trade practices, but it became formalised with the rise of large-scale commerce and banking in the nineteenth and twentieth centuries. Today, most businesses use digital accounting systems to track receivables and automate the credit control process, dramatically improving efficiency and transparency.
Key Elements and Strategies of Credit Control
Effective credit control includes careful customer assessment, clearly defined credit terms, proactive management of overdue accounts, and strategies like invoice factoring or the use of third-party debt collectors. Implementing clear internal policies ensures all staff handle credit consistently, reducing confusion and mitigating disputes.
Credit Control and Business Funding
Credit control directly impacts a business’s ability to secure external financing. Lenders often review a company's credit policies and debt collection efficiency when assessing loan applications, as strong credit control reduces financial risk. For business owners seeking to improve their working capital, understanding and optimising credit control is essential.
Access to robust funding is a vital consideration for businesses refining their credit control strategies or facing cash flow issues due to late payments. To learn more about business finance or explore funding options tailored to your needs, explore our business funding solutions for practical support and educational resources.
