Credit management

A quick guide to credit management

Whether you sell beans or aircraft carriers, you need to get them paid.  Fifty years ago, competition was cooler as demand was sustained and margins comfortable.  Credit management was not a strategic task for many a company.  Over the years, company management got more effective.  Those who could control their costs and keep reasonable sale prices survived and developed; but with reduced margins.  Therefore, professionalism in credit management became essential.

There is no such thing as the ideal credit management approach.  The best solution for your company could differ from the perfect solution for your friend’s business.  For instance, the number of bad debts you can afford depends on your margins (*).  Too many losses will make you sink.  However, if you incur very few bad debts, it might mean that your policy is excessively strict: how many sales did you miss which would have turned out as paid and profitable? Every company must find its own balance.


How to minimize bad debt whilst avoiding missing out on profitable sales?  Exporting machinery to America does not entail same challenges as selling bicycles next door.   Even though the solution will differ, the essential check list remains the same.

  • General sales conditions (or contracts): are they adapted to your business?
  • Guarantees: some are written in the law; other ones are possible by law.
  • Competent courts and applicable law (particularly relevant if you trade outside the EU borders).
  • Compensation for late payment.
  • Credit line (being the maximum amount a specific client can owe you at any time; if reached, you don’t deliver anymore until payment is received; this corresponds to the maximum risk you incur for this client): to fix a credit line (or limit) on a company, you can get business information from various providers.  This includes balance sheets etc. For consumers, sources of information are scarce (because of privacy laws). However, your sales representatives and technicians do meet your clients. It is best to organize yourself so that this information systematically goes back to the credit management department. This added to possible complaints from your clients provides up-to-date and reliable information. Reassess your credit lines regularly and methodically.
  • Identify your clients (name, address, VAT id, mobile phone of main contact, etc.): it’s simple and essential to organize and be accurate in the identification. For clients abroad, this is even more critical. Note that the type of useful information may vary from country to country.
  • Proof of order: do you have a system that enables you to demonstrate that an order was made?
  • Proof of delivery: do you have a system that demonstrates appropriate delivery?
  • Invoice verification: in some instances, it is useful to verify that your client received the goods or service, acknowledges it and has had all relevant documentation.  Let’s say you deliver for 100 000 EUR to India. If your client confirms today in writing that he has all the elements he needs to proceed to payment on due date, then you might save substantial time and efforts to get actually paid in two months (being the due date).  TCM provides such invoice verification service by a local partner.

Note: factoring is essentially a financial tool.  It can be coupled with credit insurance (the insurer indemnifies you for bad debts). Such insurance is – by essence – quite expensive and tedious (addresses – hence analyses – all your sales).

Receivables management

There are as many reasons for payment default as there are defaulted debts.  The vast majority of these defaults are not linked to solvency issues.  What tools do you have at hand?

  • Reminders: send them at short timing (5 to 10 days max).  Spacing them out could be interpreted as a lack of determination. Don’t send more than three automatic reminders as repetition undermines strength.
  • Past due worksheet: the list receivables open after 3 reminders with amounts and number of days past due.  It’s the basis for your custom actions.
  • Externalized debt management: clients that don’t pay despite a set of internal actions can be categorized in (1) strategic clients and (2) regular clients.  You’ll follow up strategic clients internally.  Entrusting regular clients to a third party will free time to focus on strategic clients (money makers).
  • Don’t wait: one stitch in time saves nine.
  • Entrust to whom?  Two solutions: (1) an attorney or bailiff or (2) a debt collector.  Attorneys and bailiffs are educated to go to courts.  Even if they try hard to think out-of-court, this “mighty solution” is deeply rooted.  Debt collectors are focused on amicable solutions.  At TCM, just 1% of the claims end up in courts.  Hence many debts are paid promptly and amicably. Moreover, significant courts costs are avoided where an executory title would be useless with an insolvent debtor.
    In some cases (B2B), the debt collector starts with the verification of several aspects of the claim, whilst sending the initial letter. Thereafter, he’ll remind the debtor by various means.
    According to Benjamin Franklin, “creditors have better memories than debtors”.  Debt collectors specialize in solving memory troubles in a positive way.  TCM offers this service in over 100 countries.
    Your best bet for a good debt collection partner is a member of the national debt collectors’ association.  In Belgium: the ABR-BVI.  Members sign a code of conduct.  Also ask for references.  See that your choice meets your expectations: do they provide information on the case development, possibly on line; do they remit systematically; do they comply to various laws including privacy laws (requiring secured communication); do they visit debtors in a professional way; do they operate abroad, etc.?
  • Finally, assess the performance of your internal system and that of your external partner.  The most common measure is the DSO (Days Sales Outstanding).   It provides the average number of days that it takes for your invoices to be actually cashed.

The devil is in the details.  Enjoy your way to success.


If your profit margin is, say, 50% (for instance for something made to measure) you need at least one in two invoices to be paid.  If you operate at a 5% margin, you’ll need at least 19 invoices paid for every 20. That is if you don’t seek profit. 

  • Margin 50% : One invoice = 1,000 ; cost of sale = 500.  Two invoices = 2,000 ; cost of two sales = 1,000 ; paid = 1000 ; result 1,000 cashed less 1,000 cost = 0.
  • Margin 5% : One invoice = 1,000 ; cost of sale = 950.  Twenty invoices = 20,000 ; cost of twenty sales = 19,000 ; paid = 19,000 ; result 19,000 cashed less 19,000 cost = 0.