Controlling Credit
Financial Reference Sheets
Future Practice Owner.
Declaration
Please note:
All financial information shared in this document is fictional data that has been created for learning purposes. It is not representative of any true financial data for Vets 4 Pets or Companion Care. This reference sheet has been based on the initial ‘controlling credit checklist’ created by the CMI, and hosted as part of Management Direct. Original content and information is, therefore, copyright 2017 Chartered Management Institute.
Future Practice Owner.
Controlling Credit
Introduction
This checklist deals with the control of credit allowed to customers and clients for goods and services. Credit control is a vital component in the process of controlling cash flow. Many companies have failed in the past because management did not understand the distinction between profitability and cash flow. An otherwise profitable enterprise can fail if it runs out of readily available funds with which to meet its commitments. Failure to control credit is a frequent cause of this situation.
When debts are outstanding, the supplier's funds are being used to finance customers' or clients' businesses rather than their own business.
The granting of excessive levels of credit, whether in terms of amount or duration, can also have an impact on profits, even if funds are readily available. There are many clear benefits to having resilient and robust systems and methods of credit control in place and these include: the prevention of, or at least a reduction in bad debts the effective control of cash flow - credit control plays a major part in this a contribution to improved returns on capital and net profit a contribution to an enterprise's ability to grow, or to survive in times of difficulty.
Future Practice Owner.
Controlling Credit
What is Controlling Credit?
Allowing customers and clients to defer payment for goods and services is a common and often necessary practice. Credit control is the totality of the policies, procedures and practices which ensure that the total amount of credit granted and the period for which it is extended are consistent with the practices policy. This will include ensuring that: credit is granted on a systematic basis; the costs of extending credit are adequately recovered; the customer or client continues to pay within the agreed terms; and requirements for access to liquid funds are achieved. Remember the saying: "It's not sold until it's paid for!"
Controlling Credit Checklist
1. Assign responsibility for credit control 2. Introduce a credit policy 3. Re-examine terms of sale 4. Assess credit risks 5. Recheck existing customers and clients 6. Recognise the effect of bad debts 7. Review the invoicing process and the issue of monthly statements
8. List overdue and total indebtedness 9. Monitor the average length of credit 10. Introduce a collection procedure
Future Practice Owner.
Controlling Credit
Controlling Credit Checklist 1. Assign responsibility for credit control Ensure that a person of appropriate seniority in the Practice is ultimately responsible for negotiating, granting and supervising credit and for ensuring the prompt collection of monies due. This should be someone who has the ability to supervise the Credit Controller and to take responsibility if the credit position becomes questionable. The exercise of this authority, however, should not be allowed to detract from relationships between individual members of staff and their customers and clients. This is especially important in the case of specialist sales personnel who are still responsible for ensuring that sales are made and goods and services paid for in accordance with the firm's terms and conditions.
2. Introduce a credit policy Introduce a clear cut maximum credit policy - covering both amount and duration of credit. Put this put down in writing so that it cannot be changed arbitrarily and make sure that it is communicated to all colleagues who may be involved in granting credit. Be sure also that customers and clients are aware of your policies. When setting your policies, bear in mind the provisions of any relevant legislation designed to promote timely payment of debts. For example, in the UK, the 'Late Payment of Commercial Debts (Interest) Act 1998', (as amended by the 'Late Payment of Commercial Debts Regulations 2002' and the Late Payment of Commercial Debts Regulations 2013'). Includes limits for private and public sector payments and provisions for businesses to charge interest on debts and reasonable debt recovery costs after specific time periods.
Future Practice Owner.
Controlling Credit
Controlling Credit Checklist
3. Re-examine terms of sale
Re-examine all quotations, price lists, invoices, statements and similar documents which you issue. Do they show the terms on which you do business, especially the terms on which you grant credit? Don't be afraid of informing potential customers and clients of your terms. If you are serious about credit control, they will need to know sooner rather than later. The chances are that they will respect you as a supplier who takes a business like approach rather than 'making up the rules as you go along', or, worse still, has no rules at all in place. Be aware that contracts are established and that all documentation prior to invoice is amended and updated as necessary. Care needs to be taken to ensure that your credit terms are not replaced by those of a customer or client as detailed on their order document.
4. Access credit risks Re-examine all quotations, price lists, invoices, statements and similar documents which you issue. Do they show the terms on which you do business, especially the terms on which you grant credit? Don't be afraid of informing potential customers and clients of your terms. If you are serious about credit control, they will need to know sooner rather than later. The chances are that they will respect you as a supplier who takes a businesslike approach rather than 'making up the rules as you go along', or, worse still, has no rules at all in place. Be aware that contracts are established and that all documentation prior to invoice is amended and updated as necessary. Care needs to be taken to ensure that your credit terms are not replaced by those of a customer or client as detailed on their order document.
Future Practice Owner.
Controlling Credit
Controlling Credit Checklist
5. Recheck existing customers and clients
Recheck the financial standing of all customers and clients on a regular basis and also at times when a sudden substantial increase in purchases is observed. Satisfy yourself that the increase is due to successful selling rather than to a competitor ceasing to supply - perhaps because of problems in securing payment.
6. Recognise the effect of bad debts
Recognise that bad debts reduce bottom line profits and destroy all the effort made in reaching the much larger value of sales required to generate those profits.
Bear in mind also the existence of any bad debt means that time and effort has been expended in trying to collect the money before it is written off and that the cost of these efforts are probably 'hidden' and never identified. However, if you have no doubtful (as opposed to bad) debts, recognise that you may have been missing out on profitable business by being over-cautious.
Future Practice Owner.
Controlling Credit
Controlling Credit Checklist
7. Review the invoicing process and the issue of monthly statements
The date on which a customer receives an invoice or statement will often determine when they will make payment. Take a fresh look at the interval between the supply of goods and services and the submission of invoices. See whether the process can be speeded up - it probably can. Likewise find out how soon monthly statements go out after the last day of the month. Ask yourself, honestly, whether their preparation and dispatch is being deferred to enable some work of lesser priority to be done.
8. List overdue and total indebtedness
The date on which a customer receives an invoice or statement will often determine when they will make payment. Take a fresh look at the interval between the supply of goods and services and the submission of invoices. See whether the process can be speeded up - it probably can. Likewise find out how soon monthly statements go out after the last day of the month. Ask yourself, honestly, whether their preparation and dispatch is being deferred to enable some work of lesser priority to be done.
Future Practice Owner.
Controlling Credit
Controlling Credit Checklist
9. Monitor the average length of credit
Calculate the average length of credit which your business is allowing - or which your customers or clients are taking. This can be calculated monthly, quarterly or even annually but ideally a monthly figure should be produced. The only thing worse than bad news is bad news which arrives too late for remedial action to be taken. The calculation required is: Total outstanding debtor balances at month end (i.e. the amount you are owed in total) x 365 =Average number of days credit you are allowing
Sales value for 12 months period ending at the same month end
For example, if you divide your total outstanding debtor balances of £10,000 by the sales value for the 12 month period of £100,000 and multiply that by 365, you find that you are allowing an average 36.5 days credit to each debtor. Establish this calculation as a regular routine. Remember to adjust the annual sales value each time you make the calculation by deducting the sales value for the earliest month and adding the figure for the most recent month. Producing a simple graph will show whether the average period for which you are allowing credit is increasing or decreasing.
Future Practice Owner.
Controlling Credit
Controlling Credit Checklist
Your graph will look like this
Look at movement between the end of one month and the end of the next and at the trend revealed by the graph as a whole. This particular approach will highlight the length of credit being allowed or taken rather than the amount. Both time and amount are relevant to profit and to liquidity.
Future Practice Owner.
Controlling Credit
Controlling Credit Checklist 10. Introduce a collection procedure
If you do not have procedures and a timetable for collection introduce these. If you do have a timetable, check whether it is followed systematically. Be polite, but firm in your collection routines. Always record details of any telephone calls, including dates and the names of people spoken to. Attempt to get clear commitments to dates and amounts of the payments to be made.
Potential Pitfalls Managers should avoid:
letting credit control to dominate everything else allowing the volume of sales to influence your view of credit- worthiness making excuses for bad payers - leave that to them.
Remember also that credit control:
is time consuming may lead to difficult conversations with customers and clients who have become used to receiving uncontrolled credit may leave an enterprise operating below maximum capacity may result in fixed costs not being recovered, in extreme cases.
Future Practice Owner.
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11Made with FlippingBook - Online Brochure Maker