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Moving towards proactive credit management

Late payments and bad debt are two of the biggest problems that businesses face on a regular basis. Poor credit management can result in cash flow issues which will seriously harm the performance of any business, large or small. Credit management may seem like a simple task that involves reacting to customers, but by taking a proactive approach you can actually eliminate many of the problems associated with late payment and bad debt.

Chasing debts can be a difficult and sometimes impossible job for any credit department, regardless of the firepower you have behind you. As well as being time consuming, the problems associated with late payment and writing off bad debt can be crippling in the long run. Taking a proactive credit management approach will see you avoid many of these difficulties.

Don’t wait for them

Waiting until customers have past due invoice dates is the typical approach that credit management departments will take, but this just creates problems and leads to automatic bad debt. Mitigating credit risk from the start will enable you to better manage your accounts and prevent cash flow problems in the future. This process will also save you time, and therefore money, on debt collections.

Software is readily available to help you with this process, allowing you to manage credit checking, credit insurance and risk analysis in a more informed and proactive way. By producing automated chase letters and copy invoices, the technology allows you to contact customers at different points throughout the procedure, rather than just waiting for non-payment to occur after the deadline.

This results in a proactive conversation with your customers, alerting them to the fact they haven’t paid the invoice and giving them the chance to raise any problems. In-built escalation procedures will alert you to accounts that may be problematic while the accurate reporting builds a more rounded picture of your credit management situation. This all gives you extra time to concentrate on more important matters.

Positive relationship

One of the key benefits of this approach is that you build and develop a more positive relationship with customers. Normally the only contact the credit department has with a customer is when payment is late. This automatically creates a bad feeling between the two parties. By being proactive, both sides can identify potential issues much earlier in the process, which leads to collaborative working before a serious problem arises.

Detailed application process

This is the first place to start your proactive approach. Putting in place a detailed credit application process will allow you to gain important information from prospective and existing customers before you extend them a line of credit. If a company is reluctant to provide information then you must follow this up and get as much as you can. The following details are some of the most important:

  • Company name and address
  • Legal structure
  • Nature of business
  • History of business
  • Names of key officers
  • Estimated annual sales
  • Trade and bank references
  • Personal guarantee

Assess everybody

The more selective you are about who you do business with the fewer problems you will have with debt collections. It really is that simple. Review and assess as much information as you can and try to obtain trade references for information about payment history, buying trends and past disputes. Engaging with your customer to learn more about them is a great way of understanding more about their business, how they work and their expectations of you as the supplier.

It’s also important to remember that you can review any accounts anytime and don’t be afraid to make adjustments to the current agreements. This proactive approach will prevent you having problems in the future.

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