Your Ultimate Guide to Creating & Implementing Effective Credit Policies

Traditionally, starting a new business was all about having faith in your product/service offering and sticking by the principles till you make it. In today’s cut-throat, competitive and entrepreneurial landscape, the only way businesses can stay ahead of competition is by adapting and moulding themselves from the word go.

Customer experience has emerged as one of the most important pillars that can define the success or failure of any business. In a bid to offer flexibility, most businesses end up introducing customer credit as a payment method. While credit as a payment method can boost sales, it can also put your cash flow position at great risk.

Let us try to understand why customer credit is important, what credit policies are, and how an accounts receivable outsourcing firm can help vulnerable organisations.

Customer Credit & the Potential Accounts Receivable Risks

Customer credit is a payment method that allows customers to purchase a product or service before paying for it in full. This method is quite common in the SME space and works in a similar manner as credit cards – however, when a business offers customer credit, it is them who take on the credit risk.

While flexible payment methods attract new customers and boost sales, customer credit can also make a business’ accounts receivable extremely vulnerable. One of the most common risks that a business faces when it offers goods or services on credit is that customers start taking undue advantage and end up with late or missed payments. Not only does this add complexities to the accounts receivable function, but also hurts the cash flow.

What is a Credit Policy and Why Is It Crucial for Businesses?

In simple terms, a credit policy is a set of guidelines that sets credit and payment terms for customers and establishes a course of action for late payments. A well-drafted credit policy safeguards the company’s accounts receivable by clearly defining the following:

• Credit limit for each customer and their payment due dates;
• Establish credit terms in case of delayed payments;
• Accepted methods of payment;
• Early payment discounts & rebates; and,
• Delinquent accounts policy.

More often than not, growing businesses often end up focusing too hard on selling & expansion. In addition, no company ever wants to be on bad terms with its customers. As a result, companies usually find themselves accumulated under late payments and bad debts. In such scenarios, a clear credit policy can protect the interest of small businesses as it highlights payment expectations & guidelines to minimise bad debts.

RELATED BLOG: Do you know that the COVID-19 outbreak has had some major implications of debt collection & management? Read this insightful blog for more!

 

Accounts Receivable Outsourcing to Create & Implement Effective Credit Policies

As you must have understood by now, a credit policy is a very important framework that will literally determine how much working capital your company has. Even if your onshore finance team is able to draft a solid credit policy, implementing it and ensuring that it is followed diligently for all customers can be quite challenging. Many finance leaders end up taking to outsourced accounts receivable services as it allows them to introduce credit control experts to the business and free up onshore staff for strategic tasks.

Here are some of the ways in which accounts receivable outsourcing partner can help your business meet your cash flow goals by leveraging an effective credit policy:

• Well-defined roles & responsibilities: One of the biggest changes you will experience when you introduce a dedicated accounts receivable team to your business is the clear demarcation of roles & responsibilities. These teams are highly agile in nature and every member knows what is expected of them. Such an organised workflow can play a key role in ensuring end-to-end implementation of your credit policy.
• Proper credit evaluation: While customer credit is a good offering for any business, it is also important to realise that your company can’t be handing out credit left, right and center. An accounts receivable outsourcing firm will ensure that in-depth background checks are performed and all relevant documents collected before credit is extended to customers.
• Clearly defined credit limits: While deciding whether to extend credit to a customer or not is undoubtedly important, it is the process of setting clear credit limits than can have a deep impact on your cash flow. Some businesses choose to lay down hard credit limits for the entire company while others choose to keep things flexible for each customer. An accounts receivable outsourcing firm will play a crucial role in both scenarios to ensure that credit limits are set as well as implemented effectively.
• Pre-determined escalation plans: Many a times, businesses find themselves looking at delayed payments with no clear escalation plans. This is where outsourcing accounts receivable to an experienced partner can prove to be a game-changer. Not only do these companies have pre-determined escalation plans, but they will tirelessly send out firm yet professional reminders to reduce the chances of bad debts.
• Proactive approach for continued growth: Finally, it is important to understand that as a company grows in size and wins more business, it will always have to go back to the drawing board and relook its policies. Compared to onshore finance teams, an outsourced accounts receivable service provider is more likely to analyse financial data and suggest improvements to the company credit policy.

RELATED CASE STUDY: QX worked with a leading recruiter in the UK to transform their accounts receivable and credit control functions. Read the case study for the entire story!

 

QX: Your Reliable Accounts Receivable Outsourcing Service Provider

QX Global Group is a leading finance and accounting service provider working with businesses across industries in the UK and US markets. Our clients in the student housing, recruitment and manufacturing industries, amongst others, have leveraged our unique partnership approach to enable finance transformation.

Get in touch to speak with our finance transformation experts and get reliable support to transform your accounts receivable process.

Originally published Jan 26, 2022 07:01:57, updated Jan 26 2022

Topics: Accounts Receivable Process, Credit Control Process