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Tuesday, June 17, 2014

8 Steps to Implementing Good Credit Management

Posted by Steve Chapman

8 Steps to Implementing Good Credit ManagementEffectively managing the credit you extend to customers allows your company to conserve working capital, reduce bad debts and create better relationships with customers. Below are eight steps to help you implement good credit management and start properly managing customer credit:

    1. Establish a credit policy and stick to it. This is the first step to good credit management. A credit policy will help you define to whom you will give credit, and under what terms.
    2. Ensure that sales documents include specific payment terms and contractual language that communicates the relevant aspects of your credit policy.
    3. Analyze aged receivables on a regular basis. Take corrective action and follow up on it.
    4. Initiate collection actions as soon as your credit policy is violated. There’s really no reason to wait.
    5. Do not extend additional credit to specific customers who are in violation of your credit policy. Make sure that your ERP system updates relevant customer transaction and credit information on a timely basis.
    6. Add controls to your sales quote/order/shipping processes that ensure customers in default do not order more products or services. Also add credit review processes to monitor customers who are stretching your credit policy.
    7. Take advantage of credit standards and afforded security rights in your industry. For example, if you’re a supplier or subcontractor in the construction industry, make sure you accurately file preliminary notices on all your jobs, and make sure you know how to properly release your lien rights.
    8. Keep your customer receivables records clean by writing off small amounts and properly applying credits to related charges.

There seems to be a certain perversity in credit management that I’ve seen, which is: If you stick to your credit policy and demand that accounts be paid in a timely manner, most customers will actually respect you more as a business partner and will not take advantage of you.

It’s easy to let past due accounts ride, but this will negatively affect your business, and it helps no one.

Armanino can help you find and implement an ERP system that will make managing credit much easier. For more information, send us an email or visit us online.

Steve Chapman

Steve has over 15 years of experience in business systems consulting, and 20 years of experience in management accounting and finance with small and mid-sized businesses in the construction, distribution, service, and technology industries.

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