A sale is not considered effective unless you are sure it can be collected or paid for within an acceptable time period. The collection system, if not well coordinated, can pose significant cash flow and by extension liquidity problems to the organization which ultimately gravitate towards its partners and business associates, like bankers and other creditors. If not well addressed at this point, it eventually leads to business failure.

However, when basic credit management principles and best practices are well observed, there is adequate business cash flow which enables the business to grow and gives it the muscle to compete effectively. Effective credit management is therefore a core finance function in every organization.

The following tips and best practices will assist every credit controller or organisation in developing a framework which, if well observed and followed, collection is guaranteed and the creditor trap is avoided. They are meant to make collection processes seamless in such a way to avoid hassle and therefore distinguish the ‘Credit Controller’ from the ‘Debt Collector’- The difference between the two being the hassle involved in meeting their goals.

Tip No. 1- Develop a Credit Policy.

“Failing to plan is planning to fail”

Develop a plan beforehand on how the credit function should operate. Formulation of this policy may be a boring activity, but it’s worth every minute spent on it. The elements should include;

  • Outline the kind of businesses to extend credit to, the circumstances under which the same is to be extended, how much credit to be extended, the terms of payment, and the triggers to the revocation of the credit lines.
  • Credit Approval Process. Identify the internal steps of approving new debtors, and how to assess credit worthiness of each debtor. Set durations to review the creditworthiness, as this may change from time to time.
  • Credit Limits. Set a criterion with which to allocate credit limits to each client. This may be based on either volume or time. You may for instance offer a preset limit for all clients until you have been with them for a particular period, or they have paid for a certain volume of business (or number of invoices) on time, or even according to their industry risk rating. However, this limit should not be set too low in a way which would constrain the customer in terms of volume-necessitating his search for another vendor. It should considerably satisfy the client needs in order to ensure they treasure the relationship.
  • Credit terms. This should cover the precise period of payment after delivery of goods and accompanying invoices. For instance “within 30 days after invoice delivery”. It should also include incentives of prompt payment (if any) and disincentives of late payment, like penalties and interest. These MUST be well understood by the client and an acknowledgement of the same signed.
  • Monitoring and escalation procedure. Set procedures of monitoring growing account balances and escalation to the relevant authorities in your organization for a decision to be reached. Eg. Red flagging all invoices over 60 days and forwarding to the Credit Manager/Director for further investigation and appropriate action.
  • Response to Bad debts. Internally decide beforehand on how to deal with accounts which have fallen to arrears. This may include shortening credit terms, reducing credit limits, closer monitoring and weekly analysis, a warning letter to the client etc all aimed at reducing exposure. If you can’t be paid for outstanding invoices, don’t let the account grow further. In extreme circumstances, you may consider using a debt collection agency or even litigation. You should also consider writing off bad debts periodically to make your ‘Receivable Account’ realistic.

Having a watertight credit policy keeps you vigilant and shows your customer that you are serious about payment, setting out the terms of engagement early enough, in addition to managing their expectations.

Tip No. 2: Know Your Customer

‘Knowledge is power’ – Don’t let your customer become a liability to your business

Even in seasons of low demand, don’t overlook this step and accept new customers blindly. Getting background information about your customers may not be the easiest task, but its first important to establish if this is a legitimate registered business. The Companies Registry can give that information, and the emergence of the Credit Reference Bureau is a great relief for information on would-be debtors. However, the 5 C’s approach is a tested way to assess your customers.

  • Assess the organisation’s general willingness to pay based on their overall attitude during the negotiations, their company values, their financial track record of the business and its directors. Factors such as court actions and dark financial past may be a pointer on the ethical and financial standing of the organization. A previous supplier, and even the internet may also offer credible information on their track record, but this must be vouched for accuracy. The character of the customer helps you set credit limits and terms.
  • From the prospective customer’s financial track record, make a decision on whether the organization is able to generate enough cash flows to meet its financial obligations including your bills as well as cover its other expenses.
  • Understand the organisation’s core capital base, the nature of liability for debts, the assets they hold and even shareholder commitments. This will clearly show you whether the organization is committed and able to pay its debts within specified time intervals.
  • Cash flow. Cash flow is considered the ‘back bone’ of the business, far more important than profitability (An organization can survive several years without profitability but without cash flow it can’t sustain operations). Consider the cash cycles of the business as well as the other obligations that the organization may have, such as payment of salaries etc. and through this it’s possible to judge whether the organization will meet its obligations in the prospective contract. For donor funded organisations like NGOs it’s important to be assured that funding will be available during the period of engagement.
  • Consider the economic conditions in the particular industry, which may require your adjustment or may affect the ability to pay, including international economic conditions which may have an effect on the domestic market, fluctuations in exchange rates etc. For instance, many donor funded organisations were starved off funding during the economic crisis in Europe and USA, which by extension affected the ability to pay.


Debtor assessment should be continuous and changes in the payment cycles should be monitored closely, to ensure that the client’s financial position is still intact.

Tip No. 3 – Invoice Correctly, Clearly and Promptly

“The devil is in the detail”

Any delay or error in invoicing automatically translates into delays in payment. Extending the time before the invoice reaches the client also extends payment terms by the same period.

The agreement with the client or order should cover issues regarding invoicing. It should specify to whom the invoices should be sent, when and how. Ensure the following;

  • Ensure invoices are raised correctly and promptly. The correct company name should be used, the goods well specified, and where there are specific order numbers or references, they should be quoted.
  • Ensure they are sent to the right person in the organization, and that a confirmation of receipt is signed. Don’t send the invoice to a busy CEO if it should be going to his or her PA or a payables accountant. Confirm if necessary.
  • The invoice should state how and when payment should be made, which had been agreed and signed by the customer before credit was approved (Under Tip No. 1-in Credit Terms).
  • Follow up with a call or email to ensure that there are no disputes regarding the invoices. This also allows the customer to give feedback on the work invoiced. Where there are disputes, solve it immediately, as some customers will withhold payment for other invoices unless a dispute on a certain invoice is sorted. Let the customer have no excuse for non-payment.

To ensure correct details are captured on the invoice, you should have someone verify the invoice details against the order, so that before dispatch any corrections are made.

Tip No. 4 – Be Assertive in asking for payment

“Give to Caesar what’s Due to Caesar”

The client at this point has no excuse but to pay what is due. When you get paid, the sale is complete. When a customer doesn’t pay, they’re hanging on to money that is rightfully yours and you should ask for it.

  • Be polite, professional and persistent; do what you say you’re going to do when you said you were going to do it. Have a routine system for following up non-payment that includes letter, email, and telephone, but be prepared to act more quickly if the amount is large or you are concerned about the customer.
  • Make immediate contact when payment has not arrived; make known to the client what figure/amount you expect and when you expect it. Follow up promises to make sure they are met, making clear the consequences of non-payment.
  • If a customer persistently pays late or makes excuses, review your engagement with them (Under Tip No. 2- Knowing your customer) and consider whether you’re prepared to continue supplying on credit terms. It may be better to lose an order, or even the customer, than supply goods, not get paid and suffer a bad debt, which you ultimately have to write off as a loss.
  • Where a customer pays by EFT or RTGS, they should send you the remittance advice in advance so that when you receive the funds, you allocate their account accordingly. Where they are sending a cheque, it should be accompanied by a remittance advice detailing which invoices are settled by the payment, for easy account allocations.
  • Periodically (preferably monthly) send each customer his statement, and also send immediately after they have made a payment and you have allocated the account. This helps to bring out disputes (if any), in addition to keeping the customer always informed.


These best practices and credit management measures are designed to ensure that the client pays you promptly. If you have followed up and still the client has refused to pay, you may consider taking legal action against them or engaging a collection agency. However, always consider the commercial reality of the situation – if for instance the customer is insolvent or has no available funds, further action is unlikely to help, so weigh the costs of follow up against the size of the debt. Nevertheless, the above tips are meant to help you not to get to this situation.


Written by our Training Manager and Published in the KASNEB NEWSLINE 2013


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