Credit Control Policy

Credit Control is a business strategy adopted by companies to encourage the sale of goods or services by providing better payment terms and extending credit to customers.

When businesses offer favourable payment terms customers are likely to make larger and more frequent purchases as they customers can plan their payments and balance their cash flow effectively.

Credit could be extended either in the form of:

? Providing credit up to a certain amount of purchases, or

? Allocating extra time/number of days for making full payments, or

? Making staggered payments in the form of EMIs, or

? Offering certain amount of credit against each purchase and so on.

Simultaneously, companies must set up well defined guidelines for the terms and conditions of extending credit. As well as define course of action in terms of late payments, to safeguard their own interests.

What are the precautions to be taken while extending credit to customers?

It is imperative to check the customer's credit history. Companies should provide credit facility only to customers who have a track record of making timely payments. This is extremely important to ensure a healthy cash flow for their own business.

If a company extends credit to a customer, who does not have the capacity to make payments on time, that business will end up with cash flow problems and may even have to write it off as bad debts, if the customers default payments.

Important Aspects of Implementing Credit Control Policy

Defining a good credit control policy is essential for providing best benefits to both parties the company and customers, at the same time, safeguarding their respective interests.

It involves determining credit worthiness of customers, defining limits for amount of credit and period of credit. Clearly describing the terms and conditions of payments or collection policy and outlining the course of action in case of delays or defaults in payments.

This will help avoid causes of friction and help maintain good relations among the business and customers.

Focus Areas of Credit Control Policy

• Determining Credit Worthiness: Determine whether customer has capacity to make timely payments or not.
• Maximum Amount of Credit: Clearly define the maximum amount of credit that can be extended for every customer or group of customers.
• Maximum No of Days / Credit Period: Describe the maximum number of days of credit that can be provided to each customer.
• Max. No. of Invoices Credit: Some companies prefer to define credit amount along with a ceiling on upper limit of number of credit invoices. For e.g. a company may decide to extend a maximum credit of Rs. 5 Lakhs for up to 7 number of invoices, whichever is earlier.
• Terms & Conditions of Payment / Collection Policy: Setting up transparent terms and conditions for collections / payments from the beginning helps both parties to be on the same page. It helps avoid any chances of delays in payments and any differences of opinions and resultant conflict.

Why Implement Credit Control?

• Ensure Timely Receipts & Healthy Cash Flow
• Save Debt Collection Time & Efforts
• Maintain Healthy Relations with Customers

How to Implement Credit Control Policy with ERP?

An ERP software facilitates setting up the following measures to implement credit control in a company.

• Defining Limits: Companies can define Credit amount, maximum period of credit, maximum number of invoices. All this information can be saved in the customer master of ERP.
• Dunning Process: With ERP companies can automate tracking payment due dates, credit limits of respective customers. Sends reminders, notifications for payments due from them.
• Reporting & Analysis : ERP provides reports for identifying trends of delayed payments or amounts outstanding from customers.
• Stop Transactions: ERP generates warning messages for company to restrict further transactions when either credit limit or credit period or the number of transactions limits are about to be reached for respective customers.

Summary

Credit control is like a double edge sword. Hence, companies need to be extremely vigilant while setting up the credit control processes. ERP Software plays a strategic role in implementing company-wide credit control policy

Read how Spectrum ERP Software helps to Implement Credit Control Policy