One of the most important activities in your company is credit management or better known as credit control. Credit management is the process to ensure that customers will pay for the products delivered or the services rendered. Credit management is of vital importance to your cash flow: you can be profitable, but if you lack the cash to continue your business, you will either be bankrupt or taken-over by someone who knows how to deal with cash.
Customers that have not yet paid are called ACCOUNTS RECEIVABLES (AR). The problem with AR is that this is money owned by your company (AR is also called debtors) over which you do not have any control. There are two huge disadvantages with AR.
As long as your client has not settled his amount due, capital remains tied in AR and without an adequate terms and conditions does not even carry interest. Capital is cash, and you can use that cash for many other, far more useful and profitable purposes.
As long as an amount is outstanding, there is a risk that the customer will not be able to pay. The longer it takes the customer to pay, the higher the risk you face for non-payment. Non-payment or bad debt means a loss of 100%. EC Credit Control recommends lodging this bad debt with us within 90 days to dramatically increase your chances of a successful collection.
At first glance the solution is simple: do not extend credit to customers. If a customer wants to purchase something from your company, tell them they should either pay in advance or pay at delivery. In that way you will not have AR, meaning all your cash is ready available and you do not run the risk of bad debt however that isn’t always possible when so many customers require 20th of the month accounts.
And in many cases where you decide not to extend credit, the customer will go to your opposition. This makes credit management an important process. In all your dealings with a customer you will have to weigh two risks: (1) the risk of late or non-payment, and (2) the risk of losing the sales.
Again this is easier said than done. Credit Management is not only an important and interesting activity, but also an extremely difficult job so EC Credit Control works as an extension of your business to ensure good money is not thrown after bad.
Read more about the importance of having and up-to-date adequate Terms and Conditions in my past blogs.
Paula – Area Manager in Wellington, Hutt City and Wairarapa