Is your credit management process hitting your profit?

Extending credit to your customers can be a great way to increase the amount they buy and develop strong relationships with them.

However, if your credit management process is inadequate, you could find some customers are paying late or not at all, potentially impacting your bottom line.

Some business leaders aren’t fully aware of the implications of extending credit to customers, or even that they’re already doing it. However, if you provide products or services to your customers and then send an invoice for payment, you’re extending credit.

If your invoice terms are anything other than cash on delivery, you’re creating a risk, however slight, that your customers may not pay. For example, offering 30-day terms on an invoice is the equivalent of 30 days of credit. Letting that payment term stretch out to 45 days, 60 days, or even 90 days just further extends that credit and increases the risk of non-payment.

With some customers, the risk of non-payment is relatively low and the benefit of offering credit is strong. However, even with customers who have a long history of paying in full and on time, there is always a risk that the next invoice is the one that doesn’t get paid. This can be due to external factors outside your customer’s control; perhaps one of their customers hasn’t paid them or they cannot secure funding or there are political interventions that have created a cash flow issue.

The key is to manage the risk with a strong credit management strategy.

There are five key elements in a good credit management strategy:

  1. Credit rating assessment. You need to decide what level of risk you’re willing to accept, then set conditions accordingly. Then, it’s advisable to check your customer’s credit rating before extending them credit. A poor credit rating could be all the information you need to avoid extending credit and, instead, insist on cash on delivery or decide not to do business with them. If your customer’s credit rating meets your pre-defined conditions, then you can consider proceeding to a contract, which should include elements including the exit period should you wish to cease trading.
     
  2. Monitoring. It’s important to monitor customers constantly, since conditions can change without warning. When you’re extending credit, monitoring efforts should include obtaining their financials so you can determine whether they still meet your conditions. If they don’t a strong credit management strategy would dictate that you cease trading with the customer.
     
  3. Invoicing. For customers to pay invoices promptly, you need to issue those invoices promptly and follow up non-payment just as promptly. This sets the expectation with the customer and also minimises the days outstanding for payments due. It’s also important to make sure your bookkeeping system is up to date to ensure you’re well aware of which customers are paying on time and which customers have failed to pay. This lets you follow up appropriately.
     
  4. Customer management. A powerful customer relationship management (CRM) system can help you control the timing of payment reminders and manage other customer communication more effectively.
     
  5. Risk mitigation. Trade credit insurance can help mitigate the risk of non-payment by protecting your account receivables. If customers don’t pay, the insurer covers up to 90 per centof the outstanding amount, so your cash flow remains unaffected. 

Trade credit insurance is the least-risky way to strengthen your credit management processes. It increases your trading confidence and helps you with due diligence and risk assessments. This lets you grow your business with the comfort that, even if a customer doesn’t pay, your cash flow won’t be cut off.

How good are you at protecting your cash flow?

Get an instant overview of potential areas of trade credit risk for your business with our free checklist. You’ll be able to identify potential gaps within your credit management process and ensure that your businesses is appropriately managing risk and enabling trade by securing your cash flow.

Disclaimer

The statements made herein are provided solely for general informational purposes and should not be relied upon for any purpose. Please refer to the actual policy or the relevant product or services agreement for the governing terms. Nothing herein should be construed to create any right, obligation, advice or responsibility on the part of Atradius, including any obligation to conduct due diligence of buyers or on your behalf. If Atradius does conduct due diligence on any buyer it is for its own underwriting purposes and not for the benefit of the insured or any other person. Additionally, in no event shall Atradius and its related, affiliated and subsidiary companies be liable for any direct, indirect, special, incidental, or consequential damages arising out of the use of the statements made information herein.