Definition
Credit Control is a strategy implemented by businesses to ensure they manage their credit effectively and prevent large sums of money from being tied up in unpaid debts. It involves setting limits on credit extended to customers, monitoring the progress of credit repayments, and taking action on overdue payments. In essence, it is a way for businesses to manage their debt level and mitigate financial risk.
Key Takeaways
- Credit Control refers to the strategy used by businesses to prevent and manage the delay in accumulation of debt from the customers. It is vital in ensuring that customers do not exceed their credit limit, to maintain the business’s cash flow and financial stability.
- Effective Credit Control involves certain standard procedures such as setting the credit limit for each customer, regularly monitoring and recovering unpaid debts, maintaining accurate records of transactions and customer details, and where necessary, initiating legal actions.
- Proper Credit Control ensures that businesses reduce the risk of bad debts, improve cash flow, and foster good customer relationships by preventing outstanding payments from becoming overdue. The ultimate goal is the company’s proficiency in terms of managing the credit it extends to its customers.
Importance
Credit control is a crucial aspect in the financial management of any business because it manages the credit offered to customers and helps to prevent excessive bad debts.
The primary objective of credit control is to ensure that businesses offer credit only to customers who are capable of paying back within the agreed timeframe.
Effective credit control reduces the risk of incurring bad debts and improves cash flow, which is vital for the smooth operation of any business.
It also helps businesses maintain profitability by mitigating the risk associated with credit sales, thus ensuring financial stability in the long-term.
Without stringent credit control measures, a business could find itself in financial difficulties, even if it is otherwise profitable.
Explanation
The primary purpose of Credit Control is to effectively manage and regulate the credit that a company offers to its customers, in order to prevent substantial debt and maintain a steady stream of cash flow. This function is critical for businesses as it helps mitigate financial risks associated with non-payment or delayed payments from customers. Most companies offer goods or services on credit, meaning that customers receive the product before payment is made, which inevitably creates a level of financial risk.
Proper credit control encapsulates the strategies and actions taken to manage these risks, aiming for the company to remain financially stable. Credit control has a range of applications, both internally and externally within a business. Internally, it provides a check and balance mechanism, ensuring that any credits granted align with the company’s financial ability to bear the risk if payments aren’t received on time.
This encompasses setting credit limits, establishing payment terms, and putting the necessary measures in place to chase delinquent accounts. Externally, credit control contributes towards building a positive business reputation as it signals financial stability and risk management, garnering trust from investors and clients. Overall, credit control is used to maintain a healthy balance between sales and risk, guarding against financial losses and aiding profitability and growth.
Examples of Credit Control
Banks and Financial Institutions: One of the most common examples of credit control is how banks and financial institutions manage their loans and other forms of credit extended to customers. They perform careful credit checks before approving loans, set terms and conditions for repayment, and continually monitor the credit performance to ensure payments are made on time.
Retail Businesses: Retailers or companies that offer credit sales or store credit cards also engage in credit control. These businesses often have a credit department responsible for deciding on terms and conditions, assessing customer creditworthiness, setting credit limits, and managing overdue payments or defaults.
Central Bank Credit Control: The central banks such as Federal Reserve in the US or Bank of England in the UK, use credit control to regulate the economy’s money supply. They adjust the interest rates, reserve requirements and perform open market operations to control the level of aggregate demand in the economy. This is to ensure economic stability by preventing situations like excessive inflation or deflation.
Credit Control FAQ
What is Credit Control?
Credit Control is a strategy implemented by companies to ensure they have adequate cash flow. It involves regulating the amount of credit given to customers and implementing measures to recover the credit in due time.
Why is Credit Control Important?
Credit Control is important because it helps ensure that a company is financially healthy. Proper credit control means less unpaid debt and better cash flow, reducing the risk of bankruptcy due to unpaid invoices.
What Does a Credit Controller Do?
A Credit Controller’s primary role is to manage the debts of a company’s creditors. Tasks include ensuring credit and collection policies and procedures are followed within your team, identifying delinquent accounts and insufficient payments, maintaining an accurate record of a company’s billing activity and conducting credit checks.
How Can Businesses Improve Their Credit Control Processes?
Businesses can improve credit control by implementing strict payment terms, conducting thorough credit checks, maintaining accurate and updated records of billing activity, integrating credit control software, and fostering good relationships with clients to ensure timely payments.
What are some Effective Credit Control Techniques?
Effective credit control techniques include: setting credit limits, offering early payment discounts, insisting on payment at the time of purchase for high-risk customers, outsourcing credit collection to agencies, and pursuing legal action for long-term unpaid accounts.
Related Entrepreneurship Terms
- Credit Limit
- Debt Collection
- Bad Debt
- Credit Risk Management
- Accounts Receivable
Sources for More Information
- Investopedia: This is a leading global source of financial content on the web with more than 20 million unique visitors and 60 million page views each month.
- Yahoo Finance: It offers a comprehensive collection of financial news, data and commentary including stock quotes, press releases, and financial reports.
- Reuters: Reuters is a leading source of intelligent information for businesses and professionals.
- Bloomberg: Bloomberg delivers business and economic news, data, analysis, and video to the world from its newsroom network.
