Managing credit in your small business hinges around information, communication and control. Before granting credit terms, do your homework and get the information you need to obtain reasonable assurance that you will get paid. Clear communications and a good flow of information and documentation will contribute to a good business relationship with your customers and clients, and follow-up will be a key aspect in your collections and cash flow.
Credit and your small business operations
Buying and selling on credit is a normal part of business. Establishing and maintaining a clear credit policy and following the proper credit practices and procedures should therefore be a fundamental part of your small business operation. Sales and marketing, production and delivery, and customer service are obviously important aspects of your business, and your credit and collections practices round out the operating cycle.
Three key concepts involved in credit are:
Information
Communication
Control
Since selling on credit is basically agreeing to deliver the products your customers order, or to perform the services they request based on a promise to pay at some future date, you will want to make an informed decision about extending credit, before committing your time and resources.
Clearly communicating your terms to the customer will avoid any misunderstandings later on. Once you decide to extend credit to a customer, the terms should be documented so that they are clear to both parties. It is also important that all persons internal to your small business, whether they work in sales and marketing, production and distribution, or accounting, operate from the same base in terms of credit.
Control involves consistency and follow-up. A credit policy can only be effective if it is carried out in practice. Guidelines should be consistently applied in the sales and billing phase, and enforced through follow-up in the collections phase.