Integrated Credit Management
Lately we’ve been receiving of questions on how to integrate good credit management practices into existing accounts receivable processes. It sounds complex, but it can be broken down into three simple steps; credit evaluation, accurate invoicing, and debt collection. By following these steps you can create a fully integrated credit management system and thus greatly decrease the amount of overdue accounts you have.
Credit Evaluation
The first step to integrating your credit management processes is to have your sales team gather important information on all potential new customers. You can do this by creating a solid credit application that your salespeople can have new customers complete. A credit application helps you better screen who you are extending credit to and it ensures you have accurate information. Customers who do not meet credit application requirements can still make purchases from you; however, on prepay, cash, or delivery terms.
Invoicing Policy
An invoicing policy can sometimes be overlooked as routine, but it is a critical component to creating an integrated credit management process. If done properly your invoicing process could help significantly cut down on seriously past due accounts. As mentioned collecting accurate information on a credit application early in your relationship with a customer will help to prevent headaches down the road. Accurate customer information means invoices won’t get lost in the mail or worse sent back to you. You should also consider electronic invoicing as the invoice gets sent directly to your customers’ e-mail. Remember, invoices won’t get paid if the customer did not receive them in the first place.
Debt Collection
Companies who are really good at keeping their receivables under control know that an important part of the equation is proper debt collection practices, be it an in house collection policy or the contracting of a collection agency; proactive companies do both. It starts with the person who handles your overdue accounts at your business, they should have well thought out processes along with standardized messaging when handling overdue accounts. Regular monitoring of accounts that have passed the 30 day mark should absolutely be followed up before 60 days and again before 90. Doing so sends the message to your customer that you won’t back down and just let the account go.
The collectability of an overdue account drops precipitously after 90 days. This is the time when the decision to send an account to collection should be made. Collection agencies can be very beneficial to your integrated credit management process as they add another layer of coverage to account monitoring. Contracting a collection agency also allows your staff to do what they do best; collecting overdue accounts is a skill set that not everyone is good at. Collection agencies have access to tools and techniques that aid in collecting overdue accounts, they’re specialists in this field.
An integrated credit management process is a way to increase your cash flow by reducing the risk of overdue accounts. It couples salespeople and accounting departments together to extend credit to those who meet the requirements and prevents extending credit to riskier ones. Invoicing processes are also brought inline to allow for accurate information and to prevent mailed invoices from being misplaced. Finally the creation of solid debt collection policies based on 30 day increments and/or the contracting of a collection agency adds yet another layer of protection and consistency. By following these three steps you can create a powerful Credit Management Process that is integrated top to bottom throughout your organization.