Credit control, also called credit policy, includes the strategies employed by businesses to accelerate sales of products or services through the extension of credit to potential customers or clients. At its most basic level, businesses prefer to extend credit to those with “good” credit and limit credit to those with “weak” credit, or possibly even a history of delinquency.
Credit control might also be called credit management, depending on the scenario under review.
Breaking Down Credit Control
Business success or failure primarily depends on the demand for products or services – as a rule of thumb, higher sales lead to bigger profits, which in turn leads to higher stock prices. Sales, a clear factor in generating business success, in turn, depend on several factors: Some, like the health of the economy, are exogenous, or out of the company’s control, other factors are under a company’s control. These major controllable factors include sales prices, product quality, advertising, and the firm’s control of credit through its credit policy.
Credit policy or credit control center on four primary factors:
- Credit period: Which is the length of time a customer has to pay
- Cash discounts: Some businesses offer a percentage reduction of discount from the sales price if the purchaser pays in cash before the end of the discount period. Cash discounts present purchasers an incentive to pay in cash more quickly.
- Credit standards: Includes the required financial strength a customer must possess to qualify for credit. Lower credit standards boost sales but also increases bad debts. Many consumer credit applications use a FICO score as a barometer of creditworthiness.
- Collection policy: Measures the aggressiveness or relaxed policy in attempting to collect slow or late paying accounts. A tougher policy may speed up collections, but could also anger a customer and drive them to take their business to a competitor.
A credit manager or credit committee for certain businesses usually are responsible for administering credit policies. Often accounting, finance, operations, and sales managers come together to balance the above credit controls, in hopes of stimulating business with sales on credit, but without hurting future results with the need for bad debt write-offs.