Credit management is the process for controlling and collecting payments from your customers. A good credit management system will help you reduce the amount of capital tied up with debtors (people who owe you money) and minimise your exposure to bad debts.

Good credit management is vital to your cash flow. It is possible to be profitable on paper and but lack the cash to continue operating your business .

Credit management tips

It is best to minimise the likelihood of bad debts through good credit management practices. The following suggestions will assist you in preparing your own policies and procedures for credit management:

Terms and conditions

Clearly state in writing your terms and conditions of trade and your credit policy in writing. Draft terms and conditions that suit your business. It is strongly advised you seek legal advice before finalising the document to ensure it has internal consistency and covers all the key issues. It's also important to ensure the document does not contain any illegal terms and can be relied on in the event that court action is necessary to recover a debt.

Include your terms on all quotes, estimates, contracts , agreements, purchase orders, and related documentation. Clearly specify what will be supplied, when the work will be done, and when and how payment is to be made. Obtain a written acceptance of the agreement along with written approval of any variations to the original agreement.

Some terms and conditions to consider include, but are not limited to:

• penalties for late payment – you must specify the exact fees and rate of interest;
• ‘retention of title' clause where the seller retains title to the goods until payment is made;
• your policy on returns and refunds;
• your policy on refund of deposits;
• incentives for early payment; and
• whether a fee is charged for payment by credit card. The amount in dollars or the percentage to be charged must be disclosed.

Invoice promptly

Include accurate details on your invoice for the goods or services supplied, the amount due along with the date and preferred payment method. Always try to resolve invoice queries or disputes quickly.

Monitor your debtors

Maintain your debtors' records to identify any due or overdue debts. Develop a good records management system and keep records up to date so you can quickly identify who owes you money and how much is owed.

Take a proactive approach to credit management by contacting clients a few days before the due date to remind them a payment is due and ask if they foresee any problems with meeting their payment.

Implement your debt collection practices the minute a debt becomes overdue and ensure clients do not exceed their credit limits.

What's next...

• Establish the right processes to manage credit
• Tips to manage debt collection
• Want more information about understanding your accounts?

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