Credit Control and Cash Flow: A Bond That Needs to Be Stronger than Ever

Credit control is directly proportional to business health and prosperity. In times of Black Swan events like the pandemic, credit management can ensure business survivability. At other times, it can ensure better financial health by seamlessly generating ideal cash flow amounts. Ensuring a steady cash flow is not just good news for the business but has a significant impact on the economy as a whole. Take the case of small businesses in the UK; paying small enterprises on time is estimated to give a £2.5 billion economic boost annually. This is huge, and we are just talking about small businesses here. Imagine the impact of timely payments achieved by larger enterprises on the economy! SMEs are bogged down by late payment of invoices, and the UK Government feels so strongly about this issue, so much so that it will tackle this problem in its Prompt Payment & Cash Flow Review.

Don’t think the cash flow problem is limited to SMEs alone. According to a survey conducted by EqualsMoney, 92% of UK businesses said they were suffering from a cash flow problem. While there are many reasons companies suffer from an issue of weak cash flow, one of these can be their inability to optimise the potential of credit control.

The Unbreakable Bond Between Credit Control and Cash Flow

Think of a business utopia. Your business’s customers pay for products/services sold immediately upon purchase. Now leave that thought and welcome to the real world, a world of business that runs on credit. Your business sells products/services to a customer who promises to pay your business within a pre-determined time frame. This promise is backed by credit control, which gives your business the confidence to extend favourable payment terms to the buyer and incur good debt. You enjoy good and sustainable cash flows if this debt is honoured within the designated time frame. If you incur bad debt, meaning the customer does not pay in time, the cash flow is impacted directly. This scenario typically happens if the credit management process is faulty or has specific chinks in the armour that haven’t been corrected.

Here’s an example of a faulty credit control process:

There’s a customer, X, who’s been delaying payments frequently, which means the gap between the due date and when the payment is actually made is increasing through subsequent purchases. This behaviour is not getting tracked and red flagged. There comes a time when this customer foregoes payment altogether (bad debt), and considering this was a large amount, it has a disastrous impact on your cash flow.

On the other hand, imagine if you have a comprehensive credit policy backed by extensive credit checks, a smooth and timely invoicing process, and a tracking, monitoring, and reporting framework; there is very little chance that customer risk passes under the radar. This helps nurture a reliable cash flow wherein most customers pay on time, improving your business’s financial health.

What are the Objectives of Credit Control?

The objectives of credit control are:

1. Minimise risk to business from customers with bad financial health
2. Ensure stable cash flow for a business
3. Strengthen a business’s financial capacity to address economic and other challenges
4. Enhance business trust and credibility amongst its suppliers

How Does a Strong Credit Policy Ensure Strong Cash Flow?

A strong cash flow means money is available to your company for its needs throughout the year, and a stringent credit policy that covers all the gaps makes this possible:

• Strict and Comprehensive Credit Check for New Customers
  Irrespective of the buyer’s reputation, you must know whether he has the financial wherewithal to make timely payments, and, therefore, a thorough credit check is a must. This sets the stage for creating favourable payment terms for the buyer and you.

• Continuous Customer Evaluation
  The financial health of your customers can change depending on the market scenario, economic pulls and pressures, and more. You, therefore, need to be aware of this change. This can be done by tracking customers’ ability to make payments on time, their insistence on getting even longer payment terms, the changing nature of their business, and more. It’s imperative to identify red flags early to reconsider the terms of engagement.

• Effective Payment Processing Framework
  You need to manage your accounts receivable effectively if you want to maintain ideal levels of cash flow. The focus should be on invoicing quickly and adhering to a follow-up process that helps track delinquent accounts and ensures they do not become bad debts. A key objective should be to take action before a customer says they cannot make payments rather than after the fact.The core focus of credit control and management is to ensure that credit policy evolves, keeping the changing nature of customers and their businesses in mind. You can make your credit control setup a lot easier by engaging a credit control service provider.

What is a Credit Control Service?

A credit control service, often referred to as a credit management service, is a financial service which help manage and maintain healthy cash flow by monitoring and controlling credit transactions with customers and clients. The primary goal of a credit control service is to ensure that a company receives payment for the goods or services it has provided while minimising the risk of non-payment and bad debt.

How Outsourced Credit Control Strengthens Cash Flow?

Businesses want more robust cash flows fuelled by an optimal credit control mechanism. However, they cannot establish this mechanism because they can’t find the necessary expertise. Even if they find this expertise, it doesn’t come cheap and can potentially drive up their overheads, something they cannot afford to do. So, they work with a lean team of accountants stretched to their limits, trying to manage credit control and other finance and accounting functions.

This is not an ideal scenario. The benefits of outsourcing credit control are that you can leverage an outsourced accounting department that only focuses on credit management, and this team can be scaled as needed and cost-effectively. You partner with a team of well-versed accountants in all aspects of credit control, including pre-invoice checks, invoicing, cash allocations, debt collection against previous aged debtors’ reports, credit control MIS reports, and more. You can rest easy knowing you can protect and grow your cash flow with a team that is effectively managing credit control.

Improving Credit Control with the Ideal Outsourcing Partner

If you want to avoid bad debts and optimise cash flow, establishing an efficient credit control function is the key, irrespective of the size of the business or its scale. But this cannot happen if you lose your way amongst the complexity of the credit control function. Moreover, you don’t want to put extra pressure on your in-house team so much so that they aren’t able to manage all the activities that are part of credit control.

QX offers outsourced credit control services that ensure your business is paid on time by adhering to the highest industry standards of credit control best practices and process excellence. You can establish a credit control function from scratch and maximise cash flow; at the same time, your in-house team can focus on other strategic aspects of accounting. Contact us today to know how we can improve cash flow be enforcing optimal credit control.

Originally published Oct 23, 2023 05:10:06, updated Nov 02 2023

Topics: cash flow management, Credit Control Process