Credit Control – Meaning and what you should know

Mar 16th, 2021

The whole purpose of establishing and running a business is to succeed, which is literally making a profit. Therefore, business owners and operators employ different strategies to ensure that they achieve this. Many times, they even go as far as offering credit to possible customers according to their capacity. The act of engaging in and controlling this process is called credit control and is what we would be discussing in this article.   

credit-control

What is meant by credit control?

Credit control refers to the different strategies through which business quicken their service delivery or product sales by extending credit to customers. Also, we can call it credit policy. Businesses most times extend the benefit of credit control to only customers with a good credit background. However, this does not mean that it exempts those with a weak background. Therefore, depending on the strategy, weak credit balance and even those with delinquency history get to benefit from this too. See what Credit Control talks about here.

How does credit control work?

Credit control basically works with the principle; a business succeeds or fails depending on the level of demand for its product or services. Therefore, when there is a higher demand for products, it experiences more profit and therefore increases in stock value. However, on the flip side, a low demand would mean losses and eventually bankruptcy depending on the situation. In addition, this does not mean that there are no other external factors that play a role in how things turn out. Some other important factors that counts are the country’s economic situation, sales prices, advertising, product quality, etc. ultimately, the company’s credit control strategy also determines a large portion of the outcome.

When a company extends credit to a customer, it makes it easier for them to make a purchase. However, the downside is that it does this at the temporal expense of the company since the customer doesn’t pay immediately. A credit control plan means that they would break the payment down into instalments, which makes it easier for customers to pay. Also, it has a benefit that the company gets a higher overall price in the end due to interest charges. Businesses today do this to attract more customers and increase sales. Lastly, credit control also has the downside of the customer potentially not paying up, especially if they have a bad credit history. As a result, a businesses’ credit control policy determines how effective its credit control would be.

What is the role of a credit controller?

The role of a credit controller is to manage the debts of the business. Therefore, he is in charge of monitoring and recovering pending unpaid sums from customers. A credit controller could typically be the brains behind the credit control policy, or just simply does the management.

What are the factors of credit control?

The factors of surrounding and controlling credit include:

Credit period: 

this is simply the duration given to the customer, in which he is expected to pay back a sum to the company

Cash discount: 

Discounts take a chunk off the original price if the purchaser pays in cash before the end of the credit period. Therefore, this acts as an incentive for them to hurry up payment, and also pay in cash.  

Credit standards: 

This takes into account the minimum required financial strength that a customer must have to get a credit. Therefore, the poorer the standard, the more people would subscribe to it. However, although it boosts sales, their low credit means customers may rarely pay, therefore running the business into debts.

Collection policy: 

This outlines how aggressive the processes through which a late sum is collected from customers. Therefore, most businesses put in strict rules, which work many times, but could also send customers packing to competitors.

Conclusion

Credit control is one of the best strategies to improve the income of a company. However, when implemented poorly, it could rather get the business into further debt. Ultimately, the credit control policies put in place, determine how effective the system would be. 

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