Credit Control Mechanism
Credit control refers to a system used by businesses to ensure that credit is given to eligible customers who can pay and pay within the agreed duration. It is a small section in the financial control system used by businesses to ensure that upon a sale, funds are released when the sum is paid.
The objective of credit control is to ensure that businesses do not become illiquid as a result of un-coordinated issues of credit to clients. It is a significant system of control since it enables avoidance of lending or issues of credit to unworthy customers in the business.
Credit control is an elaborate control system that has proved its effectiveness in many ways. As a matter of fact, it is very precise in the approach utilized in the issue of credit. The credit procedures must be followed and approved by the senior management before releasing it. Essentially, a good system contains the following sections; credit approval, credit limit approval and dispatch approvals. In larger companies, the process involves the senior manager, and various terms have been used to describe the process. The credit process takes a specified duration before the collection date, and the credit processes entail knowing your customer, account opening, approval and amount of credit.
The process involves the application of credit by the customer and the evaluation of the credit request by the finance department. Risk managers are sometimes consulted to evaluate the risk and the credit collection period determined. These processes apply before extending credit to a customer to avoid the risk of default that can result into huge pecuniary losses. Credit control is very important for small businesses because for them to grow, they must be able to give credit to customers who can pay and pay on time.
In addition, credit control enables small businesses to maintain the required financial liquidity since converting stock into cash can be impossible in a day. Issuance of credit is risky but at the same time it can spur growth of a small business. It does this by increasing sales and bad debts that would result if there is no efficient credit control system. Credit control, therefore, ensures that the business has an improved and consistent cash flow that enables smooth running of the organizations activities.
Proper management of cash flow facilitates efficiency and promotes accountability in a business. In fact, credit control avoids issues relating to debt collection. Debt collection can strain the business and lead to company failure. It is time-consuming, expensive and can result into heavy financial losses if the borrowers defaults in payment. Such defaults have failed many small businesses. Moreover, proper control of cash flow ensures that the activities of the company are financed continuously because the company cannot lack finances to undertake operations.
Credit control is, therefore, very critical to any business especially those in the manufacturing industries particularly in the UK. It promotes customer loyalty, and businesses use the strategy to explore new markets where competition is very stiff. In conclusion, prudence should be exercised in the selection of creditworthy customers to avoid bad debts and to facilitate proper control of cash flow in a business.