7 tips for successful credit management

Mar 17, 2022

tips for successful credit management

Estimated reading time: 6 minutes

What is credit management?

Debtor management and credit management are often mentioned in the same breath. Yet, we can distinguish some differences. Whereas debtor management (or accounts receivable management) mainly focuses on the pursuit of unpaid and outstanding invoices, credit management has a broader interpretation and is more broadly embedded in the order-to-cash process.

Credit management therefore also includes components such as credit risk and management, debt collection and cash flow forecasting.

What is the purpose of credit management?

Many companies focus on sales and gaining new customers, but often forget that a customer only becomes profitable once payments have been received in the company’s bank account.

In recent years, the credit management process has moved up on the list of companies’ priorities. With effective credit management, you want to get the accounts receivable balance as low as possible and ensure that important KPIs such as DSO are in good shape and remain that way.

In doing so, you can free up extra working capital and deploy it in the company, for example to pay creditors or to avoid interim financing.

Successful credit management

1. Automate accounts receivable management with software

Just a start, but oh so important. Organise your accounts receivable management efficiently with the help of suitable software and you will already have taken a big step in the right direction.

Because with software such as iController you can automate various parts of debtor management and credit management and thus set up very efficient workflows for your teams.

Here are just a few of the possibilities:

  • Proactively send payment reminders to your customers, including a copy of the invoice
  • Propose and manage payment plans and instalment plans
  • Set up automatic or manual procedures
  • Offer payment links to different payment methods
  • Next-level reporting for various stakeholders
  • Easily transfer outstanding invoices to a collection agency (including file history)
  • Factoring

2. Know your customer

Credit management has a broader role within a company. You work more on the contact with customers. You try to find out why certain customers have trouble paying, and try to find a way around this. Perhaps by proposing different payment conditions or adjusting the payment period.

Credit management is also about optimal communication between different departments within the company. It starts with sales, among others, who must try to assess whether the potential customer is doing well as a company and whether they can pay. Therefore, provide the sales department with the right tools to leverage this insight successfully.

3. Credit analysis and risk management

In credit management, we incorporate all kinds of risks into the daily workflow, such as granting credits, checking customers via credit checks and setting credit limits. The challenge is to identify these risks in advance so that action can be taken in time. After all, a customer who does not pay is a pitiful waste of time, money and resources that could be put to better use.

Therefore, regularly check the creditworthiness of customers, limit credit terms if necessary and set credit limits. These simple steps can significantly reduce the risks to your cash flow.

By the way, credit scores are not the only solution for finding out more about your prospects and customers. References from other suppliers and historical payment behaviour are also useful instruments.

Also ask yourself the following questions. Do you have the time and knowledge needed to monitor your debtors during the entire credit cycle? And can you properly assess your customers’ financial standing and solvency?

With the appropriate software that integrates information from third-party agencies and credit insurers, you can assess these risks very efficiently.

4. Protect your cashflow

If a company does not manage its money matters well, this can result in negative cashflow. All the more reason to get a grip on cashflow and keep monitoring it closely with credit management. A cashflow forecast will help your business stay on track. However, it is important to do this exercise on a monthly basis.

For a cashflow forecast, it is important to track and monitor the payment behaviour of customers. Payment behaviour looks at the speed with which customers pay invoices. And this in relation to the agreed payment term. If a debtor pays an invoice on average 7 days after the due date, we speak of a payment behaviour of +7 days.

Payment behaviour says a lot about a debtor, but a change in payment behaviour is also an important determinant. Recognising all these payment patterns is no guarantee for the future, but you can derive a number of things from them.

To make even better forecasts, more data is needed. The advanced AI technology of iController provides thorough, accurate cashflow forecasts and can accurately estimate, via statistical analysis, when a customer will pay.

5. Set out clear payment terms

General terms of sale and payment conditions are best arranged well in advance, especially with regard to the payment term and non-payment clauses.

For bad payers, it may be advisable to draw up stricter payment conditions. For example, asking for an advance or prepayment and emphasising the payment term in every communication.

6. e-invoicing

You can save a lot of time by working with electronic invoices. No more printing and posting letters and then waiting for them to be received and processed by the addressee. The faster invoices are sent out, the greater the chance that they will be paid within the agreed payment period.

By digitising this process, automation is possible and more efficient procedures can be set up. Moreover, with e-invoicing the incoming and outgoing cashflows are visible more quickly and the financial department gets a better idea of the cash flow.

E-invoicing is convenient for the customer, especially if you also offer a payment link in the e-mail. This payment link significantly increases the chance of getting a faster payment, while the ease of use for the customer increases.

And perhaps the most important reason of all: the customer can no longer use the excuse that the invoice was not received. And if the customer does try to use this excuse, you can deliver a copy of the invoice immediately.

7. Gain insight into complaints and resolve them quickly

A complaint is one of the many reasons why invoices sometimes go unpaid in credit management. That is why it is best to find a solution to a dispute as quickly as possible.

In a personal conversation concerning a complaint, a lot of things sometimes come to light. It is therefore useful to have a good tool in which you can keep notes and comments regarding the complaint. Because of this central file approach, all employees are able to deal with complaints faster, the exchange of data between departments is smoother and better conclusions can be drawn afterwards.

In iController automatic dispute management is built-in as standard. Invoices can be resent quickly, notes can be made about the dispute, and each case can be communicated or passed on internally. As icing on the cake, customers can easily make a complaint when they receive a payment reminder and dispute the invoice with a single click of a button.

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