Credit procedures and controls

Credit control is the system used by a business to make certain that it gives
credit only to customers who are able to pay, and that customers pay on time.
Credit control is part of the financial controls that are employed by businesses
particularly in manufacturing to ensure that once sales are made they are realized
as cash or liquid resources.
Credit Control is a critical system of control that prevents the business from
becoming illiquid due to improper and un-coordinated issuance of credit to
customers or even lending in a financial institution. Credit control has a number of
sections that include - credit approval, credit limit approval, dispatch approvals and
well as collection process.

How can my business improve its credit control procedures?

-Effective credit control is one of the most important aspects to running a successful
business. Without money coming in on time, your businesss cash flow can be
severely affected and the associated problems can quickly get out of hand.
What many businesses fail to realize is that the process of avoiding the problems of
late payment and bad debt begins as soon as an order is placed and your credit
control procedures should reflect this. Its a vital process that starts with knowing
your customers before you sell to them and only ends once you have been paid.
Here, we break down the credit management process into four key stages and
provide step-by-step credit control tips for businesses to follow in order to get paid
on time, every time.

Best Practice Tips for more Effective Credit Control

Cash flow is the very lifeblood of a business. In this regard, each business should
consider whether it is doing everything it can to ensure that its customers are
paying on time. Furthermore, the recovery of business debt can be frustrating, time
consuming and often unsuccessful. It is better to put in place proper procedures,
which enable the early identification of potential bad debts. Key to getting paid on
time is having an effective credit management policy.

What is credit control and why do I need a system?

Put simply, credit control encompasses all of the day-to-day office tasks that enable
you to make payments to your suppliers and be paid by your clients. Every
company - from a single contractor up to an international conglomerate - has to
walk the fine line between solvency and insolvency.
The key to successfully walking this line is cashflow.

Credit Granting Procedure

A credit review process is needed to ensure that a business does not grant credit to
customers who are unable to pay. The credit department handles all credit reviews.
The department may receive paper copies of sales orders from the order entry
department, documenting each order requested by a customer. In this manual
environment, the receipt of a sales order triggers a manual review process where
the credit staff can block sales orders from reaching the shipping department unless
it forwards an approved copy of the sales order to the shipping manager.

The order entry procedure for a manual system is outlined below.

1. Receive sales order. The order entry department sends a copy of each sales
order to the credit department. If the customer is a new one, the credit
manager assigns it to a credit staff person. A sales order from an existing
customer will likely be given to the credit person already assigned to that
customer.
2. Issue credit application. If the customer is a new one or has not done
business with the company for a considerable period of time, send them a
credit application and request that it be completed and returned directly to
the credit department. This may be done by e-mail to speed the application
process.
3. Collect and review credit application. Upon receipt of a completed sales
order, examine it to ensure that all fields have been completed, and contact
the customer for more information if some fields are incomplete. Then collect
a credit report, customer financial statements, bank references, and credit
references.
4. Assign credit level. Based on the collected information and the companys
algorithm for granting credit, determine a credit amount that the company is
willing to grant to the customer. It may also be possible to adjust the credit
level if a customer is willing to sign a personal guarantee.
5. Hold order (optional). If the sales order is from an existing customer and
there is an existing unpaid and unresolved invoice from the customer for
more than $___, place a hold on the sales order. Contact the customer and
inform them that the order will be kept on hold until such time as the
outstanding invoice has been paid.
6. Obtain credit insurance (optional). If the company uses credit insurance,
forward the relevant customer information to the insurer to see if it will insure
the credit risk.

7. Verify remaining credit (optional). A sales order may have been forwarded
from the order entry department for an existing customer who already has
been granted credit. In this situation, the credit staff compares the remaining
amount of available credit to the amount of the sales order, and approves the
order if there is sufficient credit for the order. If not, the credit staff considers
a one-time increase in the credit level in order to accept the order, or
contacts the customer to arrange for an alternative payment arrangement.
8. Approve sales order. If the credit staff approves the credit level needed for a
sales order, it stamps the sales order as approved, signs the form, and
forwards a copy to the shipping department for fulfillment. It also retains a
copy.
9. File credit documentation. Create a file for the customer and store all
information in it that was collected as part of the credit examination process.

SELECTIVE CREDIT CONTROL Credit facility is important to all economic

sectors but due to certain consideration, some sectors need special protection.
Guideline on lending to these priority sectors are issued by central bank in order to
achieve the target loans to these sectors. This priority sectors comprise of small
and medium industry, Bumiputra community, agricultural sector and low and
medium house buyers.

STAGES IN CREDIT PROCESS

Credit process is the basic concepts in the credit environment. There are four main
stages of credit process. First, credit officer will market banks facilities to the
potential customer (STAGE 1: BUSINESS DEVELOPMENT). After having a potential
customer, he will ask for customer details (job, income, address, identity number
and the others requirement) to do a credit analysis. Hence, credit officer must know
the sound lending principle or known as a credit analysis (STAGE 2: CREDIT
EVALUATION). Once the financing has approved, credit administration and
monitoring will be required (STAGE 3: CREDIT MONITORING). If the borrower default
or failed to fulfill the payment in the right time, credit officer must study the
remedial actions suitable to the customer (STAGE 4: CREDIT RECOVERY).
1. BUSINESS DEVELOPMENT
BUSINESS DEVELOPMENT CAN BE DONE THROUGH THE SELLING CYCLE
PROSPECTING- Involve the opportunities to find out the business require
financing. During this process, credit officer must identity and aware of the
credit risk and business condition because different company has different
business condition and credit risk towards financial institutions. If credit
officer failure to identify the credit risk there will potentially negative impact
to banks portfolio.

DATA COLLECTION- Credit officer will collect preliminary information with

respect to the background and nature of the business and industry that its
operates from, the pricing of the financing based on market conditions and
the type and value of security offered.
ANALYSIS AND MEETING-Credit officer should arrange to meet the prospective
customer for the purpose of making a site visit to the premises to gather
more facts about the business. This site visit is normally recorded into a Call
Report and submitted to the bank management for further comments.
SELLING AND NEGOTIATION- During the meeting and if there is sufficient
information to make proposal, the credit officer may proceed to discuss the
financing structure to ensure that the prospect is able to make repayments.
This negotiation with the prospect involves banks willing to sell his financial
products at the highest level of profit rate and the prospect hoping to gain
the lowest possible profit rate.
CREDIT MEMORANDUM- If the selling negotiations appear accommodative to
both parties, then the credit officer will proceed to prepare a credit
memorandum or application for Accommodation (AA) to recommend the
proposed financing to the finance committee for their approval.
APPROVAL OF OFFER- Upon the approval of committee by endorsing the
Credit Memorandum, the officer will proceed to prepare a Letter of Offer and
to forward to the prospect for his acceptance. In the event the offer is not
accepted by the prospect, renegotiations will have to commence. Once the
offer has met with acceptance, the officer will proceed to initiate the selling
cycle with another new prospect.
2. CREDIT EVALUATION
Credit analysis covers the following:
i.
Quantitative aspect
ii.
Qualitative aspect
iii.
Documentation process
iv.
Security and other legal aspects
v.
Profitability and relationship
vi.
Capital adequacy ratio compliance
3. CREDIT MONITORING
Follow up aspects on the financing account includes:
i.
Annual or interim reviews
ii.
Reassessment of existing terms and conditions
iii.
Renewal of financing facility
iv.
Re-establishment of borrowing relationship with issuance of a fresh
Letter of Offer and Customers acceptance of the renewed facility
4. CREDIT RECOVERY
Comprises the following actions:
i.
Winding-up proceeding by means of legal action on the company
ii.
Enforcement of guarantees against guarantors as individuals

iii.
iv.
v.

Receivership via appointment of Receivers and Managers (R&M)

Foreclosure by way of auctioning a landed property
Turnaround of restructuring by salvaging the company to generate
cash flow.