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Grant credit – assessing the 8 customers this chapter covers . . . Credit control is the process of managing customers who pay on credit so that settlement of debt is made on time. Efficient credit control is essential for maintaining the liquidity of an organisation; money not received may mean that money will have to be borrowed. This chapter takes an overview of the whole credit control process – from credit application to debt collection
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  Grant credit – assessing thecustomers 8 NVQ PERFORMANCE CRITERIACOVERED  unit 15 OPERATING ACASH MANAGEMENT AND CREDIT CONTROLSYSTEMelement 15.3Grant credit AAgree credit terms with customers in accordance with the organisation's policies.BIdentify and use internal and external sources of information to evaluate the current credit status of customers and potential customers. KNOWLEDGE AND UNDERSTANDING COVERAGE  6Legal issues: basic contract; terms and conditions of contracts relating to the granting of credit; Data Protection legislation and credit control information.7Sources of credit status information.8External sources of information: banks, credit agencies and official publications.18Interpretation and use of credit control information.30Understanding that practice in this area will be determined by an organisation's credit control policies and procedures.31An understanding of the organisation’s relevant policies and procedures.Credit control is the process of managing customers who pay on credit so that settlement of debt is made on time. Efficient credit control is essential for maintaining the liquidity of an organisation; money not received may mean that money will have to be borrowed.This chapter takes an overview of the whole credit control process – from credit application to debt collection, and then concentrates on the ways in which an organisation assesses applications from customers to trade on credit terms. This assessment process involves: ãexamining the external sources of information – banks, credit rating agencies, other suppliers – which enable the organisation to evaluate the customer ãexamining the internal sources of information available to help with the assessment decision – reports from colleagues (eg sales records, notes on visits) and analysis of financial accounts The next chapter describes how an account is set up, or, if the customer fails the assessment test, is refused. this chapter covers . . .  grant credit – assessing the customers 3 AN OVERVIEW OF CREDIT CONTROL importance of credit control Credit control is the process of managing customers who pay on creditso that settlement of debt is made on time. Aswe saw in the last two chapters, liquidity management in an organisationinvolves the timing of cash inflows and outflows – including financing andinvesting – so that the organisation has sufficient working capital andremains solvent. An important element of liquidity management is thereforethe efficient functioning of the sales ledger – or in basic terms, customerspaying up on time. If customers do not pay up, on time, or – worse still –become insolvent, this can be the result of:ãcredit terms being granted to customers who are not creditworthy (afailure in the system when the customer applied for credit), orãthe payments of the customer not being monitored effectively andwarning signs of customer financial problems not being picked up (afailure of the sales ledger management system)The result is likely to be the same: a bad debt and a consequent loss of profit. the credit control function Credit control is part of the accounting and finance function of anorganisation. The number of people employed in credit control will dependon the size of the organisation. It may be a whole department, a section, orin the case of a small business, the accounts assistant or even the proprietor.The credit control activities carried out are summarised in the diagram on thenext page, which you should study carefully. They include:ãassessing new applications for credit (either from new customers or fromexisting customers looking for an increased credit limit)ãmonitoring sales ledger accounts by using reports such as the ageddebtors summaryãchasing overdue debts and dealing with bad debtsLarger organisations are likely to have a credit control policy , a written setof procedures detailing issues such as assessment methods, credit termsgranted, chasing of debts, dealing with bad debts. An example is shown onpage xx. It will normally be accompanied by documentation such as creditapplication forms, sales contracts and chaser letters. People who work in credit control need to be highly experienced incommunication skills: they are negotiators and persuaders, but should alsobe able to take on the role of rotweillers.  4 cash management and credit control existingcustomer askingfor additionalcreditapproach bynew customerrequesting credit NO -unsuitable review situationafter 12 months formal credit agreement in line withpolicies and procedures of organisation:ã form of contractã credit period statedã credit limit establishedã credit termsãanalyse age debtor reportsãchase debts in accordance with organisation’s proceduresãstop suppliesãsolicitor’s letterãdebt collection servicesãcourt action ASSESSCUSTOMERFOR CREDITCREDITDECISIONMONITOR ANDREVIEWCUSTOMER ã polite refusalã cash trading TAKE ACTIONOVER BADDEBTS (if needed)external checks:ã banks & credit rating agenciesã supplier references internal checks:ã analysis of accountsã reports from colleagues the credit control process – an overview YES -suitable  the credit control process The diagram on the previous page illustrates the processes involved in thecredit control process. These processes will be explained in detail in this andthe following three chapters.In this chapter we examine in detail the credit checks and analyses that aremade when assessing the creditworthiness of a new or an existing customer.The sources of information are either external or internal. EXTERNALSOURCES OF INFORMATION ABOUT CUSTOMERS Organisations can consult a variety of sources of external information:ãbank referencesãsupplier (trade) referencesãcredit rating agenciesThe credit control policy document of the organisation (see page xx) is likelyto provide guidance about establishing the creditworthiness of a newcustomer and indicate what external sources should be approached. It iscommon practice for an organisation to send out a letter to a new customeralong the lines of the following: Dear SirsRef : Application to Open a Credit Account Thank you for your request to open a credit account in our books.So that I can consider your request I shall be grateful if you will supply me with:- details of your bank account - bank, bank branch address and account name, plus your written authority to your bank to release information- details (contact names, addresses, telephone numbers) of two trade references Thank you. Yours faithfully SGerrard SGerrard Credit Control grant credit – assessing the customers 5
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