Topics: Benefits of Outsourcing, Credit Control Process, Outsourcing

Effective Credit Management: How Outsourced Credit Control Can Optimize Credit Control?

Posted on September 28, 2023
Written By QX Global Group

Effective Credit Management

Credit control management services are critical to a company’s accounting and finance function and directly impact its financial health. Simply put, credit control ensures that the payment terms extended to a new customer are based on their sound financial health and ability to make the payment on time.

Companies depend on the four Cs of credit management to exercise stringent and enforceable credit control. These are essential four parameters that help evaluate the creditworthiness of the customer. The inability to correctly size up the customer’s financial capability can be bad news for your business, resulting in payment default or a financial loss. Let’s understand these Cs better:

Character

No, ‘character’ doesn’t mean whether the person is likable or not, but it focuses on the financial character of the person, specifically their credit history. Here’s an example – The cost-of-living crisis has seen an uptick in Buy Now Pay Later (BNPL) payment products, with almost 38% of survey participants (from amongst 3000 workers surveyed) saying they use such products and another 15% saying they have plans to use it. Now, think about it for a second.

How would a financial services provider determine whether a person has the creditworthiness required to be eligible for such products? The answer lies in going through the prospective borrower’s track record of debt repayments. You are evaluating the financial character of this person, and can do so by going through the credit report of this person generated by either of the three credit bureaus, including TransUnion, Equifax, or Experian. The character is also defined by the collection accounts and bankruptcies, information that is again available through credit reports.

Typically, the information in the credit report enables companies to work out a credit score, which decides whether the customer gets credit and the payment terms; customers with a good credit score get attractive payment terms, and others might not get the same terms.

RELATED BLOG: Guide to creating & implementing effective credit policies

Capacity

Capacity, is the prospective buyer’s capacity to pay on time. It is an important metric, because more often than not, when customers are buying on credit, the amount is at the higher end of the scale.  Evaluating the customer’s capacity involves mapping the income to the customer’s recurring debts. The debt-to-income, or DTI ratio, helps the company decide whether good credit terms should be extended to prospective customers. A lower DTI can ensure better payment terms to the customer and vice versa.

Capital/Cashflow

From the perspective of ‘capital’ you must consider the amount of money paid upfront and the remaining payment. If the capital contribution decent, the chances of default are reduced proportionately.

A business must also look at the credit perspective from the ‘cash flow’ angle. How do they generate cash, and what repayment terms do they offer their own customers? If the business has customers who pay after 90 days and your payment requirement is 30 days, you might have a problem. In such cases, you must check whether the business has a line of credit with a bank.

You can ask for income statements or balance sheets to understand their business’s financial health. How will this help? If the company is in sound financial health, you can offer competitive payment terms. The whole idea is to check whether they can fulfill their payment obligations.

Conditions

If you do not follow a standardized credit control management process, there is a chance that you will overlook this ‘C’. Conditions refer to the prevailing market conditions in which the customer operates. If there is a product or service whose demand is above a certain threshold, you can be assured that the customer is on a financially strong wicket and has the potential to become a long-term customer. On the other hand, if their market is experiencing headwinds or is seasonal, you need to be a little more careful when finalizing payment terms.

Think of the 4 Cs of credit control as the foundational elements of getting credit control right, but considering this function will demand to be scaled, to meet the growing needs of your business, you will need access to scale your team of accountants, and this is where outsourced credit control services UK can help your company strategically.

What is Credit Control Outsourcing?

Outsourced credit control services help you optimally manage your cash flow and avoid bad debts by shouldering the responsibility of credit control and act as an extension of your in-house accounting teams. Think of outsourcing your credit control function as a strategic activity that ensures you receive prompt payments, adhere to best practices, and benefit from an efficient process that can be scaled easily.

The benefits of outsourced credit control:

  • Access an easily and consistently scalable team of dedicated credit control professionals whose core objective is reducing Day Sales Outstanding (DSO) and cash collection shortfalls. The fact that this team is only focused on this one function means you can be confident that no credit report or pertinent customer information falls through the cracks, ensuring credit control efficiency.
  • The focus is on implementing a highly effective and standardized credit control function that includes daily call log monitoring, tracking the real-time status of ledgers chased, and call barging that helps deliver high-quality assistance and resolve payment issues.
  • Sometimes, following up on a delayed invoice can result in an angry customer who feels he is being harangued unnecessarily. There can be a case wherein a long-standing customer of repute feels needlessly pressurized and disrespected, impacting business relations. Here, a bit of politeness, gentle reminders, and an empathetic attitude can deliver rich dividends, and outsourced credit control services have trained communicators who ensure they don’t get on the wrong side of your customers.
  • The whole idea behind outsourcing the credit control function is to free up your in-house team of accountants so that they can focus on strategic activities. While credit control is also a strategic activity, specific repetitive, time-consuming tasks are a part of this process, and an offshore team of accountants ensures your in-house team isn’t caught up in them.
  • While cost-effectiveness is a massive benefit of outsourcing, it can also be leveraged strategically; the fact that an outsourced accounting department is managing your credit control means they have the time to leverage all the information at their disposal to create insightful reports that can not only improve performance and plug collection inefficiencies but also help you gain visibility into cross-sell and upsell opportunities.

RELATED CASE STUDY: Streamlining Credit Control and Accounts Receivable for Leading Recruitment Business

The Right Credit Control Management Services Footprint

The ideal approach towards maximizing the benefits of outsourcing credit control is to first search for the right provider, ask for references, have a comprehensive discussion about your expectations and understand the deliverables, and only after you are sure about the capabilities of the outsourcing provider, should you hire their services.

QX is a renowned finance and accounting services provider with an industry-leading reputation for delivering world-class services that cover the length and breadth of finance and accounting. With QX, you can scale your accounting function quickly, benefit from cost arbitrage, and leverage the best industry talent that brings immense value to the credit control function.

Originally published Sep 28, 2023 08:09:42, updated Mar 26 2024

Topics: Benefits of Outsourcing, Credit Control Process, Outsourcing


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