CREDIT CONTROL - 21.03.2011

Does every customer need credit?

Sales ledger review

When you review the sales ledger balances, you’re probably looking to see if there’s a problem hidden in the detail. For example, identifying slow paying customers who could eventually turn out to be bad debts, so that you can put them on stop or even provide against them in your management accounts. However, this time you’ve noticed a lot of the smaller balances are taking longer to pay.

You may not have paid much attention to small amounts in the past as larger balances present a proportionately greater risk. Besides, when faced with a query your credit controller has a good track record of ringing up the smaller clients and getting the money in. However, if your company is increasing the number of new customers it’s going after, there’s no trusted credit control relationship to fall back on. Therefore, there could be a growing credit risk hidden in these balances.

Is credit necessary?

Providing for a bad debt can feel like you’re closing the stable door after the horse has bolted. Indeed, if the customer was likely to be risky in the first place, why do business with them and lose out? Although you can prevent good money going after bad by having an effective system for putting accounts on hold, you won’t know who is going to be a good or a bad payer at the outset. What’s the solution?

One radical approach would be to ask yourself the question: “Does the customer actually need or even warrant credit?” For example, if the customer is only ordering a small quantity of your product, they should be able to finance that out of their own resources, as it’s not going to be a major drain on their cash flow. So giving them credit terms is a bonus to them. Or if they are a new customer with no credit history, why are you giving them any credit at all?

Tip. Don’t give every customer credit. They probably don’t need it. Instead, get customers below a certain monetary limit to pay upfront by credit card. The credit card charges you suffer will be minor compared to the savings made in avoiding bad debts and wasting credit control resources.

Cardholder not present?

If you intend to ask more of your customers to pay by credit card, there’s something you might like to add to your in-house procedures. Although there isn’t a problem with most credit card settlements, evidence suggests that there is an increasing trend for cardholders to reject transactions appearing on their statements resulting in an immediate chargeback to the supplier by the credit card company. The supplier then has to submit evidence that this was a legitimate transaction.

Tip. For new customers in particular, issue a specific remittance advice about the payment having been taken by credit card and attach their copy of the receipt from your point of sale machine. This gives you the evidence to help make the payment stick, should it later be rejected by the cardholder.

For an example of a remittance advice specific to credit card payments, visit http://financialcontroller.indicator.co.uk (FC 03.06.03).