13 Best Practices in Credit Management
The definition of Credit Management
When an organisation lends goods, services or money to others, the credit management function makes sure their transaction with that customer is safe and profitable. Throughout this blog, we will list 13 Best practices when it comes to Credit Management:
Have a Credit Policy
Emphasise the importance your business places on managing financial risk by setting out your policies and procedures in a Credit Policy, which is made available to all staff. Having a Credit Policy defines what best practice looks like in your organisation and encourages consistency.
Be Aligned
Do all internal departments fully understand the importance of the business being paid on time, and the consequences of late payment? Foster a collaborative approach between the sales team and credit control so they work together to achieve mutually beneficial outcomes. This could include having joinedup meetings, training sessions or informal ‘job swaps’ to create deeper understanding of the respective functions and objectives.
Assess and Monitor Credit Risk
Have a clear understanding of what level of risk is acceptable to your business. Assess customer creditworthiness by reviewing their financial statements, references and obtaining a credit report. Do this at the onboarding stage but make sure to continually monitor throughout the customer lifecycle, and particularly when an increase in credit has been requested. Set and update credit limits in line with your assessment and use them to manage the risk appropriately in order to avoid the risks of bad or doubtful debts.
Be a billing pro
Aim for 100% invoice accuracy. The invoice is the key document in making sure you get paid on time so avoid costly delays caused by poor accuracy. Clearly state the payment due date and give the customer details of your accepted payment methods and who to contact in the event of a query. Have your terms displayed on the reverse including your right to charge interest if payment is delayed. Raise the invoice as soon as the goods or services have been provided and have a robust system in place to ensure the customer receives it promptly
Consistency
Implement a systematic follow-up process for overdue payments. This may involve sending reminder notices, making phones calls or initiating automated email notifications. Using dedicated financial management software can help automate many of these processes, shifting the burden from the collections team who are released to focus on priority areas.
Understand your customer
Build positive customer relationships by encouraging open and proactive communication. Use clear language and consistent messaging across all forms of communications: be clear on what you expect the customer to do and also let them know how they can engage with you. Getting to know your customers will give useful insights into their payment behaviour, and building open and honest communication can help remedy potential issues before they cause a problem.
Increase payment options
Look at your accepted payment methods from your customers’ point of view: how convenient is it for them to pay? Are there any barriers, such as only being able to pay by having to call with card details during office hours? Offering alternative options such as online payments, electronic fund transfers and Open Banking technologies are likely to improve the customer experience, which increases the likelihood of you being paid on time.
Develop High Performers
Depending on the size of your business, have a dedicated collections team or personnel who are responsible for credit management. Upskilling through best-practice CICM training helps collectors deal confidently with any situation. Becoming a CICM member and pursuing professional qualifications is another great way to learn new skills, demonstrate competence and develop your career.
Understanding Metrics
Diving into an aged debt report is a good way to quickly identify which accounts are overdue and in need of urgent attention but monitoring trends in your ageing profile will allow you to see if your overall approach is achieving results. If your 90 day + debtor position is worse than six months ago then spend the time to understand why, and make changes to improve. Using segmentation in your data analysis (such as grouping by business unit or location) will return more meaningful insight. Applying the same approach to DSO delinquency analysis will also help highlight any problem areas.