LALI Business Consulting Pty Ltd

Buidling better business for today and the future

Financial management: Credit management

How well you are managing your debtors?

“A sale is not completed until the cash is collected”. Credit management is a critical part of financial management. Even highly profitable business could fail if they fail to manage their debtors as they can critically affect cash flow of the business.

Credit control is a key part of the financial management of your business. Establish proper credit contol procedures in your business.

How about a check list to help your credit management?

Use this check list establish a credit control system:

1. Ensure a control system in place to check and document credit worthiness of your customers. Credit checks can be done by asking for and checking trade references. You can also get a credit report for the customer online for a small fee.

2. Set credit limit for each customer depending on their business profile.

3. Regularly review each customers’ credit risk using the quality of credit reference check, how long they are doing business and their payment patterns.

4. Establish a procedure in the financial management credit control system as to how to handle situations when a customer reach their credit limit. Each person dealing with the customers in the business should be aware of the credit limit of the customers.

5. Establish payment terms and include them in each invoice to the customer. Ensure in your financial management, credit control system is sending out reminders and follow up regularly with the customers.

6. Ensure credit notes are processed for good returned on time to avoid disputes and delays in payments.

Few other things to consider….

Maintaining a good customer relationship is the key in managing credit situation of your business.It is a good practice to communicate with customers on a regular basis to understand their business and review the terms of trade and credit limit regularly (at least annually). It is also quite important to choose the right customer who you want to do business with.

Also set up key performance indicators (KPIs) for your credit management like DSO, age analysis of debtors and bad debt % and review them each month to take necessary actions.

By using proper financial management tools like credit control systems and KPIs to monitor them, you can better manage your customers, cash flow and therefore increase your business performance and profitability.

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This entry was posted on 09/01/2012 by in Financial management.

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