Controlling credit.[check] This checklist deals with the control of credit allowed to customers and clients for goods and services In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility (unless the "good" is a "bad"). It is often used when referring to a Goods and Services Tax. . Credit control is a vital component in the process of controlling cash flow. Many companies have failed in the past because management did not distinguish 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 and failure to control credit is a frequent cause of this situation. The supplier's funds are being used to finance customers' or clients' businesses rather than the business of the supplier. The granting of excessive credit, whether in terms of amount or of duration, can also have an impact on profit, even if funds are readily available. Definition Allowing customers and clients to defer de·fer 1 v. de·ferred, de·fer·ring, de·fers v.tr. 1. To put off; postpone. 2. To postpone the induction of (one eligible for the military draft). v.intr. payment for goods and services is a common and often necessary practice. Credit control is the totality TOTALITY. The whole sum or quantity. 2. In making a tender, it is requisite that the totality of the sum due should be offered, together with the interest and costs. Vide Tender. of the policies, procedures and practices which ensure that the total amount of credit extended and the period for which it is extended are consistent with the organisation's policy. These 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 the need for access to liquid funds is achieved. Remember: "It's not sold until it's paid for!" Benefits of credit control Credit control: * prevents bad debts * plays a major part in the control of cash flow * contributes to improved returns on capital and net profit * may make the difference between an enterprise's ability or inability to grow * may be the key factor in an enterprise's ability to survive in times of difficulty. Problems with credit control * Credit control: * is time consuming * may lead to difficult relations with customers and clients who have become accustomed to receiving uncontrolled credit * may leave an enterprise operating below maximum capacity * may result, in extreme cases, in fixed costs fixed costs, n.pl the costs that do not change to meet fluctuations in enrollment or in use of services (e.g., salaries, rent, business license fees, and depreciation). not being recovered. None of these 'disadvantages', however, provides a good reason for not controlling credit. Action checklist 1. Assign responsibility for credit control Ensure that one person in your organisation, at a suitably senior level, is ultimately responsible for negotiating, granting and supervising credit and for ensuring the prompt collection of monies due. Appoint someone who can supervise the Credit Controller and can be accountable if the credit position becomes questionable. The exercise of this authority should not detract from detract from verb 1. lessen, reduce, diminish, lower, take away from, derogate, devaluate << OPPOSITE enhance verb 2. the relationships with customers and clients of individual members of staff, especially specialist sales staff. The latter still have a responsibility for ensuring that sales are made and goods and services paid for in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. 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. Write it down so it cannot be changed arbitrarily. Be sure that it is known to all your staff who may be involved in granting credit. Be sure also that customers and clients are informed about your policy. The Late Payments of Commercial Debts (Interest) Act 1998 gives small businesses the right to charge larger business customers interest on overdue OVERDUE. A bill, note, bond or other contract, for the payment of money at a particular day, when not paid upon the day, is overdue. 2. The indorsement of a note or bill overdue, is equivalent to drawing a new bill payable at sight. 2 Conn. 419; 18 Pick. accounts. 3. Re-examine re·ex·am·ine also re-ex·am·ine tr.v. re·ex·am·ined, re·ex·am·in·ing, re·ex·am·ines 1. To examine again or anew; review. 2. Law To question (a witness) again after cross-examination. terms of sale Terms of sale Conditions under which a firm proposes to sell its goods or services for cash or credit. 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 telling potential customers and clients your terms. If you are serious about credit control, they must know sooner or later. The chances are that they will respect you as a supplier with a businesslike busi·ness·like adj. 1. Showing or having characteristics advantageous to or of use in business; methodical and systematic. 2. Purposeful; earnest. 3. approach rather than as one 'making up the rules as the game progresses', or, worse still, having no rules at all. Be aware that contracts are established and modified by each successive piece of paper prior to invoice An itemized statement or written account of goods sent to a purchaser or consignee by a vendor that indicates the quantity and price of each piece of merchandise shipped. A consular invoice is one used in foreign trade. . Care needs to be taken to ensure that your credit terms Credit Terms The conditions under which credit will be extended to a customer. The components of credit terms are: cash discount, credit period, net period. are not replaced by those of a customer or client as detailed on their order document. 4. Assess credit risks Be clear in your own mind how you assess credit risks for new and existing customers and clients and how you impose limits in terms of a customer or client's indebtedness and in terms of time. Satisfy yourself that you and your staff do this in a systematic way and that the potential volume of turnover which a customer or client may offer is not a factor which you take into account. Recognise that salesmen are optimists by nature--especially if commission is involved. Pursue other sources of information before increasing or establishing credit facilities credit facilities npl → facilidades fpl de crédito credit facilities npl → facilités fpl de paiement credit facilities for existing or potential customers or clients. Sources might include trade and bank references, credit agencies and rating registers (Dun and Bradstreet for example), trade sources and your competitors, and online sources--see Useful reading. 5. Recheck existing customers and clients Recheck the financial standing of all customers and clients on a regular basis and also when purchases show a sudden substantial increase. 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. Recognise also that any bad debt means that much abortive abortive /abor·tive/ (ah-bor´tiv) 1. incompletely developed. 2. abortifacient (1). 3. cutting short the course of a disease. a·bor·tive adj. 1. effort will have been expended ex·pend tr.v. ex·pend·ed, ex·pend·ing, ex·pends 1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend. 2. in trying to collect this money before it was written off and that the cost of this effort is probably 'hidden' and never identified. 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. 7. Review the invoicing in·voice n. 1. A detailed list of goods shipped or services rendered, with an account of all costs; an itemized bill. 2. The goods or services itemized in an invoice. tr.v. 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 cannot 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 A dispatch or dispatches can refer to:
8. List overdue and total indebtedness You should prepare an Aged Debtors Analysis, which is a monthly list of all those whose settlement is overdue. List their total indebtedness as well as the overdue amount analysed by the month in which payment was due. If slow paying habits reflect financial difficulties, the whole debt may be at risk. 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 extracted. The only thing worse than bad news is bad news which arrives too late for remedial action A remedial action is a change made to a nonconforming product or service to address the deficiency. Rework and repair are generally the remedial actions taken on products, while services usually require additional services to be performed to ensure satisfaction. . The calculation required is: Total outstanding debtor One who owes a debt or the performance of an obligation to another, who is called the creditor; one who may be compelled to pay a claim or demand; anyone liable on a claim, whether due or to become due. balances at month end (the amount you are owed in total) / Sales value for 12 months period ending at the same month end x 365 = Average number of days credit you are allowing 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 [pounds sterling] and multiply mul·ti·ply v. 1. To increase the amount, number, or degree of. 2. To breed or propagate. 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 most remote month and adding the most recent figure. Keep a very simple graph which will show you whether the average period for which you are allowing credit is increasing or decreasing. The graph will look like this: Look for movement between the end of one month and the end of the next AND look for the trend revealed by the graph as a whole. This particular approach will emphasise length of credit being allowed or taken rather than the amount. Both time and amount are relevant to profit and to liquidity. 10. Introduce a collection procedure If you do not have a collection procedure timetable introduce one. If you do have a timetable, check whether it is systematically followed. Be politely firm in your collection routines. Remember to always record details of any telephone calls, including dates and the names of people talked to. Attempt to get clear commitment to dates and amounts of payments. Dos and don'ts for controlling credit Do * Have a clear vision of what you require from credit control. * Remember that a businesslike approach is attractive to the right type of customer or client. * Regard the control of credit as a vital regular check on the financial health of your business. Don't * Let credit control dominate everything else. * Allow the volume of sales to influence your view of credit-worthiness. * Make excuses for bad payers--leave that to them. Useful reading Credit controllers desktop guide, 2nd ed Roger Mason For other uses, see Roger Mason (disambiguation). Roger Le Roy Mason (born September 18, 1958 in Bellaire, Michigan) is an American former professional baseball player who pitched in the Major Leagues primarily in relief from 1984-1987, 1989, and 1991-1994. London: Thorogood, 2004 Essentials of credit collections and accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying , Mary S Schaeffer Hoboken NJ: John Wiley John Wiley may refer to:
Credit risk management: a guide to sound business decisions, H A Schaeffer New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of : John Wiley, 2000 Thought starters * How does the length of credit you receive compare with the length of credit you allow? * What incentive to pay promptly do your customers or clients have? * If they only deal with you because of the credit you allow, it doesn't say much for your goods or services, does it? [GRAPHIC OMITTED] |
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