You are lending to customers for nothing
Payment terms are credit. You handed over the goods, you will get the money in thirty days, and for that whole period you are financing someone else's working capital out of your own. The only difference from a bank is that the bank charges interest and you do not.
While the company is small this is invisible: you know every debtor by name. Then there are forty customers, three salespeople, each with their own private arrangements, and it turns out half the company's working capital is sitting in other people's tills.
This is not about being hard on customers. It is about payment terms being a deliberate decision with a known price, rather than the residue of nobody having done the arithmetic.
Work out what it costs
Five minutes of simple maths.
Step 1. Take average receivables — how much customers owe you at any given moment.
Step 2. Establish what money costs you specifically. If you have borrowing, it is that rate. If you are declining a supplier's prompt-payment discount, it is the size of that discount. If you have no borrowing and are declining nothing, money costs you nothing and receivables genuinely are free.
Step 3. Multiply. That figure is what you pay each year for the privilege of offering terms.
It is then worth splitting receivables in two: what is within agreed terms and what is overdue. The first is normal and is a condition of doing business. The second is no longer credit — it is a problem, and it is the part to act on.
Four things to fix in writing
Credit control is not a report. It is four rules agreed before the first debt exists.
1. A credit limit per customer
How much this specific buyer may take on credit. Not "depends on the situation" — a number. For a new customer it is zero or minimal, rising with payment history.
2. Payment terms
Fixed and written into the contract. "Whatever we agree" means the negotiating will be done by a salesperson whose interest is in the sale rather than the collection.
3. Who authorises shipping over the limit
The most important item and the one most often skipped. A limit without a defined override procedure does not work: sooner or later a large order arrives, the limit is exhausted, and the decision is made by whoever happens to be nearby. There has to be one person and one way of recording the approval.
4. What happens when an invoice goes overdue
A sequence of actions with dates: when the reminder, when the call, when shipments stop, when it goes to a solicitor. Written in advance and identical for everyone — at which point it stops being a conflict and becomes a procedure.
A chasing sequence that does not damage relationships
The fear behind weak credit control is always losing the customer. In practice customers are lost not to chasing but to its inconsistency: months of silence, then an abrupt call with an accusation in it.
| When | Action | Tone |
|---|---|---|
| 3 days before due | Automatic email with amount and date | Neutral, informational |
| Day it falls overdue | Email noting the term has passed | Equally neutral |
| +7 days | Call from the account manager | Establish the reason, not apply pressure |
| +14 days | New shipments stop | Automatically by rule, not by decision |
| +30 days | Formal notice | Formal |
The key is that the first two steps are automatic and impersonal. When the same reminder goes to everyone systematically, it does not read as distrust of that particular customer.
What the system turns into a mechanism
Software does not replace discipline, but it converts three of the four rules into something that runs by itself.
- The limit is checked as the order is entered, not discovered at month end. The salesperson sees the block immediately and has no time to promise anything.
- Going over the limit requires approval from a defined person, and that approval is recorded. "I thought it was agreed" stops happening.
- Aged debt reporting builds in seconds: what is owed under 30 days, 30 to 60, over 90. That report is what shows whether the problem is a one-off or systemic.
- Reminders go out on a schedule without the account manager doing anything.
How payments and bank statements are matched against invoices is covered in bank reconciliation, and splitting receivables by manager or region for analysis relies on dimensions.
The mistakes that cost most
A limit exists but nothing enforces it. The most common version: a figure sits on the customer card and nothing prevents shipping beyond it. That is not a limit, it is a note.
The prompt-payment discount is not calculated. Many companies set it by feel. It should equal the cost of money over the terms offered, otherwise you are either overpaying or nobody takes it up.
Salespeople are paid on sales, not on collections. If commission is earned at despatch rather than at payment, the incentive structure works against you. That is an organisational decision and no software fixes it.
Overdue debt is discovered at period close. A month is too long a cycle. Something spotted in week two can still be worked; spotted at close, it is a fact. See period close.
Frequently asked questions
What level of receivables is normal?
The absolute figure says nothing — look at turnover and at the overdue share. Debt within agreed terms is a normal condition of trading. The warning sign is the overdue portion growing month on month, even when the total stays flat.
Will tighter credit control frighten customers away?
What loses customers is inconsistency: months of silence followed by a sudden accusation. When reminders go out automatically and identically to everyone, they read as procedure. The customers who leave are usually the ones who were paying badly anyway.
Where do we start if there is no control at all?
With an aged debt report. Until you can see how much is owed under 30 days, how much over 90 and by whom, any rules will be theoretical. That report is usually what wins the argument for change.
Can credit control be run from a spreadsheet?
You can record debt in one, but not control it. A spreadsheet shows the position after the fact. It will not stop a despatch as the order is entered — and that is what control actually means.
Who should be responsible for collection?
Whoever made the sale. If commission is earned at despatch rather than on payment received, receivables will grow regardless of what rules or systems are in place.