Towards a Better Credit Control

The major cause of credit risk is lack of regard for credit control policies. Companies have their liquidity expunged by accumulation of huge trade receivables. In most of them, management overrides laid-down credit control measures.

The Boards of directors  sometimes fail in discharging their oversight functions. And the song on the lips of everybody is: Strengthen the risk management in these companies. Suffice it to say that the chief cause of failure of all risk management measures is neglect of the implementation of the measures put in place to reduce the undesirable effects of risk.

P.M. Stevenson, a credit expert in the U.S., proffered the following guides for the effective control of credit risk:

1. Classify your customers based on their credit-worthiness.
2. Set a credit limit for each customer and refuse to give credit that a customer cannot handle conveniently.
3.   Avoid ambiguity in stating the terms of payment before the credit is given.
4. Ensure that probable excuses are eliminated by delivering only goods in good condition to the customers or giving allowance for faulty ones immediately you have been notified.
5. Use correspondence, telephone conversation and visits by key officers in trying to collect debts.
6. Do not hesitate to write-off any debt that seems irrecoverable, instead of wasting valuable resources in chasing the customer who has defaulted.
7. Maintain a proper record of sales debtors by compiling a good sales ledger.
8. Periodic, regular reports on debtors, their outstanding balances and overdue accounts should be given to the management.
9.  A periodic target of cash collection from debtors should be set and monitored.