I recently reviewed a company’s latest accounts and was amused by the following note which, to me, sums up the ignorance of the credit control function in large companies (SME’s as well but, this was a large company.
When commenting on “principle risks and uncertainties” the director states (in part) “Credit risk arises on the Company’s trade debtors. The company has good credit control systems monitoring outstanding balances continuously and taking necessary action where debts remain unpaid”
I won’t argue that they follow up on unpaid debts (I know the company so, I could but, I won’t!) but, what I take issue with is what seems to be their understanding of what direct control is. You see, by stating they take action on unpaid debts, merely confirms they are reactive rather than pro active and see credit control as debt collection and that is it! Well any credit controller or credit manager will tell you that is simply debt collection and not credit control!
In order to manage credit risk properly, it is important to understand what credit control actually is and it is far more than debt collection!
The ‘control’ does not start with receiving an order, or whatever procedure is used to notify credit control of new customers. The control must start with a level of authorisation/involvement in agreeing real-time credit terms: sales staff sell, commercial department review contracts and credit control, controls the credit and ultimately the risk to the company of granting credit, reviewing and setting payment terms, credit limits etc.
It is not uncommon to have conflict between sales and credit control but, that is an article for another day. All I will say is that it is vital that credit control and risk is considered at the sale stage and preferably at prospect stage with credit risk taken into account as well as clauses in respect of remedy for late payment.