Must Knows

Credit control: All you must know

[] The main purpose of credit control is to extend credit to a customer to make purchasing of goods or services easier. 

Credit control, also known as credit policy, consists of the tactics used by businesses to increase sales of products or services with the extension of credit to potential customers or clients. In the initial stages, businesses prefer to extend credit to the clients with “good” credit, and limit credit to those with “weak” credit. Credit control may also be known as credit management, depending on the scenario under review. In any well-run business, it plays a key role in reducing bad debts and improving cash flow.

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Credit control means

Demand for products and services plays a key role in determining a business’s success or failure. As a rule of thumb, more sales result in higher profits, which influences the stock prices. Sales are an important metric in generating business success, and they are affected by external factors such as the health of the economy, and internal factors. Controllable factors include the firm’s credit policy, sales prices, product quality, and advertising.

In simple terms, the main purpose of credit control is to extend credit to a customer to make purchasing of goods or services easier. Rather than delaying payment for the customer, this strategy divides the purchase price into payments, which makes the purchase more appealing to the customer, although interest charges increase the overall cost.

Increased sales results in increased profits, which benefits business the most. The essential aspect of a credit control policy is to figure out to whom the credit can be extended. Extending credit to individuals with a poor credit history may result in not being compensated for the goods or services sold. A business might be adversely affected by this, depending on how much bad credit is extended. Businesses should figure out what kind of credit control policy they want and are capable of implementing.

Credit control: Who is it suitable for?

The aim is to ensure that banks, financial institutions, retailers, and manufacturers loan to only those customers who have a high likelihood of repaying their debt. Credit control in the company is monitored by the risk committee in order to minimise losses due to poor loans. Among lenders, this process of control management is known as credit control.

Credit control: Policies

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When drafting its credit control policy, an organisation can decide the credit control wishes to enact. Options can range from restrictive to moderate to liberal. The company’s restrictive credit policy means they only extend credit to customers with a good credit history. The company’s moderate policy means they take on a middle-of-the-road level of risk, and the company’s liberal policy means they extend credit to nearly everyone.

Liberal credit control policies are usually preferred by businesses that strive to gain a greater share of the market or that enjoy high-profit margins. A firm with a monopoly may be inclined to adopt a restrictive policy, due to the low threat of competition. The customer base of a company in this enviable position is unlikely to upset it much.

Credit control: Factors

The major focus of credit control is on the following four factors,

  • Credit period

This is the length of time a customer has to pay.

  • Cash discounts

If the purchaser pays in cash before the end of the discount period, some companies will reduce the discount percentage. Cash discounts present purchasers with an incentive to pay in cash more quickly.

  • Credit standards

The minimum level of financial strength required by a customer to qualify for credit. A less stringent credit policy is good for sales but increases bad debts. Many consumer credit applications use a FICO score to measure creditworthiness.

  • Collection policy

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This metric measures the aggressiveness with which accounts are being collected. It is possible that a tougher policy will increase collections, but it could also anger customers and drive them to a competitor.

Several businesses typically have a credit manager or credit committee that administers their credit policies. Often accounting, finance, operations, and sales managers work together to balance credit controls.

Credit control: Importance

Consider a situation in which a lender makes a faulty decision and lends money to a borrower with a poor credit history. Regarding the past credit history, there is a likelihood of the borrower not paying or delaying payments.

A borrower who cannot repay the debt and defaults on payments could end up with insufficient liquidity over time and might have to shut down their operations if this continues on a larger scale.

Through credit control, prospective customers are only chosen if they have a good history of paying back their debts. This will make sure that the company will have enough cash flow and liquidity to maintain its operations.

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Category: Must Knows

Debora Berti

Università degli Studi di Firenze, IT

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