What is Credit Control?
Credit control as the name implies refers to the financial controls that businesses employ. These financial controls are mostly in manufacturing, in order to ensure that once sales are made, they are realized as cash or liquid resources.
Credit control is a system of control that ensures that a business does not become liquid owing to improper issuance of credit to customers. When you talk about credit control, it has a number of sections like credit approval, credit limit approval, dispatch approvals, and collection process.
A large business credit process is managed by a senior manager. The business credit process includes processes like Know Your Customer (KYC), account opening, approval of credit and credit limits, an extension of credit, and effecting collection action. However, credit control will normally report to the Finance Director or Risk Management Committee.
On the whole, credit control seeks to extend credit to a customer. This is to make it easier for a customer to purchase a good or service. Now, this strategy delays payment for the customer, which makes the purchase more attractive. Or breaking down the purchase price into installments. Howbeit, this makes it easier for a customer to justify the purchase. Even though the interest charges will increase the overall cost.
Every day, businesses strive to move their sales which in turn leads to more profits. This is where credit control comes in. The major function of credit control policy, however, is in determining who to and who not to extend credit to. This is because extending credit to individuals with a poor credit history can result in not being paid for the good or service sold. Now, depending on the business and the amount of bad credit extended, this can have an adverse effect on a business. Thus businesses are to determine the kind of credit control policy they are willing and able to implement.
Steps for Issuing Credit
these process may be followed:
- A formal letter of application for credit to a customer entity will be required.
- The Head of Finance will check the credit filed.
- Risk managers will check if the credit tallies with the current risk portfolio.
- The credit collection period, which is usually in days, is considered both as a stand-alone as well as a part of the capital cycle to ensure it does not exceed the Payables Period (usually in days too). On the other hand, external agencies may be invoked to assess the risk associated with extending credit to the customer. Fillers will also be made into the market to assess the credit of a firm.
- An internal evaluation is also carried out. Because of considering the risk of Bad or Doubtful Debts against the profit or returns.
- Once the Risk Manager and Finance Director are pleased that the extension of credit will not result in loss of principal. Then credit is extended.
- Thereafter, the account is opened with the credit setting agreed upon: which is the cap of credit the customer will enjoy as well as the terms or duration which they will enjoy that credit.
Credit Control Factors
Often, Credit control also known as credit policy focuses mainly on the four following factors:
A credit period is the length of time a customer has to pay.
This is a percentage reduction of discount from the sales price offered by some business. This happens when the purchaser pays in cash before the end of the discount period. These cash discounts, offer purchasers an incentive to pay in cash faster.
Credit standards include the required financial strength a customer must have in order to qualify for credit. Lower credit standards boost sales but at the same time increase bad debts.
It checkmate collection on slow or late paying accounts. Even though a tougher policy may speed up collections, it could also anger a customer and cause them to take their business elsewhere.
In summary, debt may pose a serious strain on the company. This could lead to company failure. This is because, extended credit could, despite all efforts made become non-collectible. When this happens, a Debt collection agency may be hired along with legal, court and other fees.