Debtors are one of the largest assets in the financial statements of a company and should therefore be safeguarded through timely collections. Many solvent companies have gone under-receivership for failure to manage and collect from their clients. For a positive cash flow, debtors must be managed through effective credit control methods.
If you met a stranger in the bus stop and they borrowed some cash from you, and promised to repay at a later date, would you advance them credit? Obviously your answer will be no, on the basis of that they are a stranger to you. If this is so to an individual why would a company give goods and service to a client whom they don't know or have no information about? Good credit management therefore begins with know your customer.
Just like personal finance, cash inflows are few compared to cash outflows and therefore for a company survival, it must manage its debtors books, otherwise all margins will be drained by bank loans and over-drafts borrowed to run the day-to-day operations of a company. If good credit control is put in place, cash will be collected faster and borrowing will be minimized thus saving the company from heavily on loans and overdraft.
There are different types of customers and there are those that won't pay unless they are reminded to pay and there are those that wait to see a reminder letter in order to pay. Most companies have realized that buying goods and services on credit can help them run the business without borrowing cash to pay for stock that will not be purchased immediately. The way to survive in high interest economy is by buying goods and services on credit and pay at a later date.
Failure to collect on time implies that the operations of a firm will be financed by borrowed funds which off course come with an interest charge. This can be minimized or avoided by carrying out good credit control management to ensure timely payment and query resolutions that may lead to delayed payment. The key role of a credit control department is to ensure timely collection of credit sales.
New clients must be credit checked to ensure that they are credit worthy and are able to meet their obligations when they fall due. A credit controller upon credit checking should advice the management accordingly if credit business is a risk to the company or not. This can be done using different means like credit checking with a credit reference bureau, registrar of companies, other suppliers and financial statements of the company.
Zipporah Njoroge is a Credit Consultant and a trainer in the area of credit control and management and the principle of Credit And Debt Management Services Ltd.