Effective Credit Management for SMEs

Early in my career I could not understand why my boss held our Credit Controller in such high regard — financial reporting played second fiddle. Years later, as a Finance Manager and then CFO, I realised how important effective credit management is — not only to performance but to the very existence of organisations.

Every year, start-ups and small businesses fail; a main cause is cash flow problems from slow-paying customers and bad debts. Without a clear credit-control process, your business's ability to grow and survive is under threat.

The credit-control process

1. Signing up a client

Guided by the credit policy: financial statements and ratio rules of thumb; credit reports on payment history (including CRB reports); bank references; the customer's payment history with your firm. Apply the 5 C's of credit: Character (willingness to pay), Capacity (ability from operating cash flows), Capital (financial reserves), Collateral (pledged assets), Conditions (general economic conditions). Then sign a credit contract setting out the terms.

2. Client ordering

Via LPO/LSO as set out in the agreement.

3. Servicing

Supply goods/services; issue a delivery note or job card.

4. Invoicing

Where credit management 'proper' starts. Invoices must be accurate and on time — most clients only start ageing invoices once received and posted; do not give them an extra reason not to pay.

5. Credit collection

Establish a realistic timetable: politely remind customers of the payment schedule on fulfilment; send reminder letters the day an invoice becomes overdue; follow up every 7 days; after a defined period, pass the debt to a reliable commercial collection agency.

6. Client ledger management

Post all invoices, credit/debit notes, payments, and discounts correctly for a clean customer statement and debtors ageing report.

7. Feedback

The most overlooked step: keep reiterating the agreed payment terms to clients.

Key success factors

• Know your customers and monitor debtor behaviour over time;
• Set credit-collection targets (days to collect) for your team and reward achievement;
• Establish a credit-control committee so no single individual controls approvals and write-offs;
• Outsource old debts (the older a debt, the less collectible);
• Offer various payment avenues — cheques, M-Pesa, cards, cash.