Quick guide to keeping your credit management system in order

Effective credit management is vital to maintaining healthy cash flow and minimising financial risk. We’ve compiled practical steps to help you keep your credit processes organised, from setting robust policies and assessing customer creditworthiness to managing collections and using insurance. 

1. General credit guidelines

The foundation of effective credit management is a clear and comprehensive credit policy. It ensures that all departments understand their responsibilities and are aligned. Ask yourself:

• Is your documentation complete and up-to-date?
• Are your guidelines robust?
• Are they consistently applied across the organisation?

2. Contractual framework

Ensure all contractual documents are clear and legally sound to withstand disputes. This includes:

• Payment terms
• Order forms
• Terms and conditions

3. Customer data

Accurate and regularly updated customer data is essential. Key details include:

• Correct billing address
• Legal structure of the business
• Owner or managing director
• Contact information

4. Creditworthiness checks

Extending trade credit without assessing customer reliability is risky. Regularly evaluate creditworthiness, especially for high-volume or high-risk clients.

Key indicators

Maintain up-to-date data on:

• Cost of financing receivables
• Average Days Sales Outstanding (DSO)
• Bad debt levels
• Structure of receivables

5. Trade credit limits

Set clear credit limits for each customer. Consider:

• Is there a transparent and consistent system for allocating credit lines?
• Are decision-makers qualified to make balanced assessments?

6. Payment terms

Tailor payment terms to customer risk profiles to reduce exposure. Options include:

• Prepayment
• Down payment
• Payment on delivery
• Standard payment periods and due dates
• Discounts
• Date of actual bank credit

For new or unknown customers, consider requiring cash or upfront payments.

7. Debt collection system

Implement a structured and efficient debt collection process. Ensure:

• Your collection team is well-organised and follows established procedures
• Reminders are clearly and professionally worded
• Collection efforts consider customer value and individual circumstances
• Staff are trained to handle phone-based collections
• You collaborate with reputable agencies or solicitors when necessary

8. Securities

Require appropriate security from customers to reduce losses in case of insolvency. Credit insurance can offer broader protection and is a valuable tool in managing risk. Consider the following aspects:

9. Customer crises and insolvency

Maintain regular contact with customers showing signs of financial distress. Legal advice may be necessary in insolvency cases.

10. Export coverage

When trading internationally, seek expert guidance. Consider:

• Local payment practices
• Securitisation tools
• Country-specific collection strategies
• Insolvency procedures
• Specialist information sources
• Alternative coverage options such as credit insurance

11. Software

Use receivables management software to streamline operations. Conduct a cost-benefit analysis before investing, and ensure current systems meet quality standards.

12. Outsourcing

Outsourcing parts of your credit management can be cost-effective. Services may include:

• Protection against customer defaults and non-payment (credit insurance)
• Financing (factoring, forfeiting, asset-backed securities)
• Debt collection (agencies, solicitors)

13. Benchmarks

Compare your credit processes with those of competitors or sister companies. Use benchmarking data to identify gaps and align with best practices.

14. Staff training

Invest in ongoing training through seminars, workshops, and industry events. Sharing experiences with other companies can help your team adopt proven strategies and stay ahead of market developments.

To explore how these insights can strengthen your own credit risk strategy, get in touch with us to see how we can help you stay ahead.