Signs of bad credit management

Maintaining a business while faced with cut-throat competition is a challenge for most entrepreneurs and businessmen. But challenges are not solely external, there are also internal factors that must be overcome to ensure success in business.

One of the more important aspects of a business that should be managed is the company’s credit management policies. With over 10,000 businesses failing every year because of late payments, businesses should be more alert about their credit management and be diligent in looking out for signs of a failing credit management policy.

Here are the most common early warning signals that a business’ credit management policy needs to be improved:

1. Extended aged-debtor lists – If your debtors are always paying invoices way beyond the agreed credit period assess your collection methods and try to identify areas that could be improved.
2. Reaching the overdraft limit – If your company almost always reaches or breaches the limit of your bank’s credit facilities and services, you must review your asset management policies and credit management in detail to see where the problem may lie.
3. Customers using complaints at your expense -- Your clients may begin to take advantage of your business’ inefficient system by making specious complaints and queries to extend the credit period in order to improve their own cash flow at your business’ expense.
4. Conscientious payers getting scarce -- If your customers who have a reputation for being prompt payers start slowing down their payments to your business they may have recognised that your collection system is very slack. This is quite a negative development.
5. Customers becoming insolvent -- A credit insurance or a reliable internal system of credit risk assessment can help protect your company from poor credit management particularly if your company is very heavily reliant on the business of one particular customer or if you have a list of customers who have a vulnerable position in terms of cash flow.
6. Administrative excuses -- Such excuses as a “computer failure” is also a tell-tale sign that your customer may have recognised that your credit collection system has a flaw and thus could be exploited to there advantage.
7. Credit ratings and market rumours – A bad credit rating or a damaging rumour about your business can do a lot of damage to your company and business. It can affect your chances of attracting new business and could, in the long term, affect your cash flow.
8. Suppliers stop their service -- If at some point your business stops paying its bills there will come a time when you would have exceeded your credit limit with your suppliers and they will stop their services or deliveries to you.
9. A drop in staff morale – Your staff usually has a feel for what is happening to the business they will notice if the business is showing signs of difficulties. A bad environment like this means you risk losing your best employees. This would make your situation even worse.

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