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You can listen to our blog, “Credit Management: Everything You Possibly Want to Know” while on the go.
Credit management is your company’s strategy for preventing late payments or defaults from your consumers. A successful credit management strategy employs a constant, proactive process of recognizing risks, assessing their potential for loss, and strategically guarding against the hazards that come with granting credit. Having a credit management plan protects your company’s cash flow. It also improves performance and lowers the risk of default.
Why Credit Management is Important?
Late payments and payment defaults occur at an alarming rate. Minimizing these defaults is crucial to your company’s financial health. Customers who take a long time to pay might put your company’s sustainability in jeopardy. This is why you need a credit management system.
It’s difficult for many firms to effectively assess and track the creditworthiness of new consumers. Customer risk management becomes much more complicated when doing business with overseas clients. This is because it might be difficult to grasp and rely on information used by foreign countries to determine creditworthiness.
It’s critical to complete the challenge: Customers that default on their invoices cause one out of every five small-to-medium business bankruptcy. Even though medium and big businesses are better able to handle a bad debt loss, non-payment occurrences can nevertheless wipe out profits and derail expansion plans.
You can assist your firm in bringing in the money it is entitled to. You can do this by ensuring long-term business continuity by implementing excellent credit management practices.
How to Do Credit Management?
There are no two firms that are alike. That’s why you’ll need a credit management strategy that’s targeted to your company’s demands, industry, and clients. Experts believe that the best techniques for credit risk management include optimizing contract management. You can also rely on accounts receivable collections, recognizing and analyzing the risk of new clients defaulting on payments, and developing a proactive credit risk mitigation plan.
When it comes to contracts, make sure to spell out the delivery and payment terms in writing. Also, use any other clauses in the contract. This is where you can specify whether or not specific conditions apply. Check with your trade association for the conditions that are often used in your business as a starting point.
We also recommend having a lawyer evaluate the terms of the contract before signing it. It may also make sense to be upfront with your consumers. Inform them that you are credit insured in your contract and invoicing. This makes it obvious that late or non-payment will have more serious consequences.
Credit Management & Accounts Receivable Collections
You must ensure that all relevant data shows on your invoice when collecting accounts receivables so that payment is not delayed. Here’s an overview of what you should include:
- Name, address, and phone number of your organization, as well as a contact name
- Your customer’s correct firm name and address, as well as the correct customer contact person
- The nature of the commodities or services, as well as their number
- The price should be in the right currency
- An agreed time frame for payment
- Number of bank accounts
- Print your small terms on the reverse of the invoice
If payment has not yet been received before or on the due date of an invoice, the accounting department or the sales department should call the customer. This also depends on the relationship with each customer. The call certifies that the things you provided were received, as well as that the invoice was received.
This step not only simplifies the payment procedure but also provides excellent customer service to ensure that everything is in order. If your client is dissatisfied with the delivery, this step can help you avoid late payments. While you still have time to fix the problem. You may even give your consumer a modest discount if they pay before the deadline.
Develop a Strategic Credit Management Procedure for Late Payments
Because not all clients pay their bills within the agreed-upon payment term, make sure you have an efficient late payment credit management policy in place. Call the customer and follow up with a written reminder that you anticipate payment within a reasonable amount of time. This can span to one week if the payment is late.
If payment is still not received, you can issue a warning and subsequently a formal written notice. This usually requests payment within two business days and specifies a deadline by which the funds must be paid before legal action can begin. Including fees to account for collection and interest expenses, given the costs associated with late payments.
If you agree to a late payment plan, write down the conditions of the agreement and make sure to include the following information:
- The entire sum owed
- The payment schedules
- The exact dates that contributions must be received
- If payments will be wired/transferred electronically, bank account number and other routing information will be required
You should also keep track of the customer’s progress using a credit management system. Is it true that they are following the rules? Is it possible that they’re about to declare bankruptcy? Notify your credit rating agency as well.
Notify your credit rating agency as well. Late payments by your client may have an impact on your creditworthiness, emphasizing the need of implementing a credit control strategy. Credit insurance means that your carrier will handle late payment follow-up and collections, which can save you time and effort while also preserving your client connection by removing you from controversial talks.
The Bottom Line
we recommend performing some preliminary research to learn as much as possible about the organization when you first meet a new customer. Consider using a variety of information sources for your customer credit study, including the local Chamber of Commerce and credit bureaus, bank and trade references, firm 10K, and so on. Existing consumers should be reviewed on a regular basis. In the credit management process, being proactive throughout the research phase is critical.
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