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Tips for effective credit control in a small business

Updated: Nov 13, 2019

Frank Knight CEO Debtsource


With South Africa’s relatively high (and increasing) interest rates, it has never been more important to ensure that credit control happens effectively within a small business. For any business that sells the bulk of its goods and services on credit terms to other businesses, collecting money timeously is critical not only to cash flow, but to the survival of the business. All too often though, business owners think of credit control as “phoning for the money”, but sadly this approach will not yield the required results. Here is a list of tips that businesses need to focus on in order to ensure that their cash keeps flowing.


1. Understand what credit costs you are prepared to extend. For example, if you operate on an overdraft facility prime plus 2% and assuming inflation at 5.75%, the cost of credit is calculated at 18% per annum (12.25% plus 5.75%) or 1,.5% per month. This means that any amount outstanding for 30 days will cost you 1.5% per month. Differently put, every R 100 000 in credit granted will cost you R 1 500 per month, or R 18 000 per annum. It is crucial that business owners build this “cost of credit” into their pricing model. The definition of credit management centres around the maximum amount outstanding for the shortest possible period. Once you understand how much it costs you to extend credit, you will realise the importance of implementing strategies to recover your cash as quickly as possible.


2. Get your paperwork right! Incomplete agreements or application forms that are not properly designed, completed or signed are sure to frustrate your collection processes and periods. Taking legal action against a delinquent debtor with half-baked documentation will prove to be a real challenge, so best get this right on every account. Get proper advice on your documentation and make sure that these are meticulously implemented and filed.


3. Figure out what the main reasons are for non-payment from customers. Once you are armed with what creates the most queries or even credit notes, you can set about fixing the problem. Often simple issues such as pricing queries, filing of delivery notes or not getting your documentation to the right people can cause unnecessary delays in payments, especially where larger companies or government departments are involved. By analysing every credit note reason, or by simply talking to your credit controllers about their frustrations it may be possible to speed up the process by eliminating fundamental process issues.


4. Get your sales team on board to help collect your money. Remember that a sale is not a sale until the account is paid, so by asking your sales team to help in recovering your cash you quickly teach them the importance of making sure that the cash is flowing. They are often best placed to help resolve queries on invoices or pricing issues and can work very effectively with your credit controllers for good results.


5. Review your debtor age analysis as often as possible, but at least every 14 days. A quick update meeting with the credit team will highlight potential issues and will show you where you have shortcomings in your business. Remember that whatever problem your client is experiencing with your business, it usually ends up on the age analysis by the client refusing to pay, or part-pay their account. This can be a source of great insight into what your customers are experiencing.


6. Write off bad debts as soon as the amount is no longer recoverable. We often see amounts outstanding on the age analysis that have not been recoverable for some time, yet still linger on the books. Remember every debtor account you write off will include a 15% VAT component, and by decreasing your profits a further 28% tax saving will ensue. While the point of effective credit control is not to write off bad debts, it is crucial that they are written off timeously.


7. You don’t have to sell to every customer. By chasing sub-standard debtors in an effort to increase turnover, you will quickly find that recoveries from those debtors become a challenge. Not every debtor will pay you – and most certainly not on time - but you have to implement effective mechanisms to select quality debtors. The alternative could sink your business.


Credit control should be seen as the end product in converting successful sales to cash flow, rather than seeing it as a consequence of the sales process. By following the above tips companies can save money, improve profitability and more importantly, stay in business. Very few businesses go out of business with piles of cash in the bank – effective credit control can lead you to that place!

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