Effective credit control is essential for the financial health of any business. In New Zealand, understanding and managing credit control can significantly impact your business’s cash flow and overall financial stability. This guide will delve into the key aspects of credit control, providing valuable insights for businesses operating in New Zealand.
What is Credit Control?
Credit control, also known as credit management, involves the strategies and practices that a business employs to ensure that customers pay their invoices on time. It encompasses policies and procedures for extending credit, assessing creditworthiness, and collecting overdue payments.
Importance of Credit Control
1. Enhances Cash Flow
Effective credit control ensures that a business receives payments on time, which is crucial for maintaining a healthy cash flow. This allows businesses to meet their own financial obligations, invest in growth opportunities, and avoid cash shortages.
2. Reduces Bad Debts
By implementing strict credit control measures, businesses can minimize the risk of non-payment and bad debts. This involves thorough credit assessments before extending credit and proactive debt collection practices.
3. Strengthens Customer Relationships
Clear communication and fair credit policies can help build trust with customers. By setting clear expectations and providing manageable credit terms, businesses can foster long-term relationships.
Credit Control Practices in New Zealand
1. Setting Credit Terms
Establishing clear credit terms is the foundation of effective credit control. These terms should include the duration of the credit period, interest on overdue accounts, and penalties for late payments. In New Zealand, typical credit terms range from 30 to 60 days.
2. Credit Assessment
Before extending credit to a new customer, it’s essential to assess their creditworthiness. This can be done by:
Checking credit references from other suppliers.
Reviewing financial statements.
Conducting credit checks through credit reporting agencies like Equifax or Centrix.
3. Invoicing
Timely and accurate invoicing is critical. Ensure that invoices are clear, detailed, and sent promptly. Include all necessary information such as the payment due date, methods of payment, and contact details for any queries.
4. Monitoring Accounts Receivable
Regularly monitor accounts receivable to identify overdue accounts. This can be done using accounting software that provides real-time updates and aging reports. Quick action on overdue accounts can prevent further delays in payment.
5. Debt Collection
Implement a systematic approach to debt collection. This can include:
Sending reminder letters or emails as soon as an invoice becomes overdue.
Making follow-up phone calls to discuss payment arrangements.
Engaging a debt collection agency if necessary.
6. Legal Actions
In cases where debts remain unpaid despite repeated efforts, businesses may need to take legal action. In New Zealand, this could involve issuing a statutory demand or filing a claim in the Disputes Tribunal or District Court.
Best Practices for Credit Control
1. Develop a Credit Policy
A comprehensive credit policy provides a framework for managing credit control. This policy should outline:
The criteria for extending credit.
The process for credit assessment.
Procedures for invoicing and collections.
Actions to be taken for overdue accounts.
2. Train Staff
Ensure that all relevant staff members are trained in credit control procedures. This includes sales, customer service, and accounts receivable personnel. Regular training sessions can keep everyone informed about best practices and any changes in policy.
3. Use Technology
Leverage technology to streamline credit control processes. Accounting software can automate invoicing, monitor accounts receivable, and generate aging reports. Customer relationship management (CRM) systems can track customer interactions and payment histories.
4. Communicate Clearly
Clear communication with customers is crucial. Ensure that credit terms are understood at the outset and remind customers of upcoming due dates. Open communication can help resolve any payment issues before they escalate.
5. Review Credit Limits
Regularly review and adjust credit limits based on customers’ payment histories and current financial status. This can help mitigate risks and ensure that credit is extended responsibly.
Challenges in Credit Control
1. Economic Factors
Economic fluctuations can impact customers’ ability to pay on time. Businesses must stay informed about economic conditions and be prepared to adjust credit policies accordingly.
2. Legal and Regulatory Changes
Changes in legislation can affect credit control practices. It’s important for businesses in New Zealand to stay updated on relevant laws, such as those governing debt collection and consumer protection.
3. Customer Relationships
Balancing strict credit control with maintaining good customer relationships can be challenging. Businesses must navigate this balance to ensure financial stability without alienating customers.
Future Trends in Credit Control
1. Automation and AI
The use of automation and artificial intelligence (AI) in credit control is expected to increase. AI can analyse large amounts of data to predict payment behaviors and identify high-risk customers, allowing businesses to take proactive measures.
2. Real-time Credit Monitoring
Real-time credit monitoring tools provide up-to-date information on customers’ credit statuses. This can help businesses make informed decisions about extending credit and managing accounts receivable.
3. Integrated Financial Solutions
Integrated financial solutions that combine accounting, invoicing, and credit control functions can streamline processes and improve efficiency. These systems can provide a holistic view of a business’s financial health.
Conclusion
Effective credit control is crucial for the financial stability and growth of businesses in New Zealand. By implementing best practices, leveraging technology, and staying informed about economic and regulatory changes, businesses can manage credit risk and ensure timely payments. As the landscape of credit control evolves, businesses must adapt and innovate to maintain strong financial health.
Whether you are a small business owner or a financial manager, understanding and applying these credit control strategies can help safeguard your business’s financial future.
