Proactive credit management in 5 simple steps

For every business, credit management is crucial. It’s striking that many companies lack credit management and only take action when invoices remain unpaid. They get stuck in the first two phases of the Credit Maturity Model, which guides the way to optimal credit management in four phases. Credit management is more than accounts receivable management; it reduces Days Sales Outstanding (DSO), improves cash flow, and identifies not only risks but also opportunities.

Below are five essential steps for proactive credit management.

1. Develop a policy

Effective credit management starts with a clear policy. Define clear frameworks and communicate them actively, so employees and business partners know what to expect. When should you send a reminder? At what point do you stop delivering? When are further steps justified?

Base the policy on your organization’s objectives. Do you want to improve cash flow or aim for a lower DSO? Consider your customers; tailor the policy to their specific situation. For example, tighten the reins with a customer on the brink of bankruptcy compared to a growing company with an excellent payment reputation.

2. Segment your customer portfolio

Segment customers based on risks and opportunities. A differentiated approach for each customer group is crucial. Analyze the financial position of customers and assign them a grade. Align this with the importance of the customer to your business. Monitor customer relationships more actively for greater importance and reduce risks.

In practice, for example, closely monitor a large customer with substantial orders to maintain control over DSO and cash flow. Consider flexible delivery terms for a startup with promising potential but limited financial resources.

Tip: Determine who your customer will be by requesting a credit report for each potential customer in advance. Based on the creditworthiness from the credit report, decide whether to proceed with this customer.

3. Look ahead

Be proactive and anticipate developments. Use internal and external data to identify risks and opportunities. Is there a chance of terminating a customer within 12 months? Consider shorter payment terms. Conversely, a sales forecast may indicate growth potential; use these insights for a more intensive collaboration.

4. Monitor the accounts receivable portfolio

Keep your finger on the pulse; the financial position of customers can change rapidly. By regularly requesting a credit report, you can intervene in a timely manner to prevent unpaid invoices. Make agreements about partial deliveries or advance payment during financial challenges and when creditworthiness is insufficient. In positive developments, you can benefit by expanding the collaboration further.

5. Automate processes

Minimize errors and arbitrariness by automating processes. Speed up and standardize the acceptance process. Automation contributes to sustainability goals, such as transitioning to e-invoicing. Moreover, automation makes reporting at every level simple, ensuring decisions are always well-founded.