Effective Credit Management for SMEs


Eleven years ago, on my first job, I couldn’t understand why my boss held our Credit Controller in high regard. It was very clear that the job was very important, and Financial Reporting played second fiddle. To me, the job was always lackluster since the organisation rarely gave services on credit. Fast forward; later in my career, when I became a Finance Manager and later a CFO, I realized how important effective credit management is; not only to the performance of organisations but their very existence!

Every year, start-ups and small businesses in the world fail. One of the main reasons for this is cash flow problems caused by slow-paying customers and bad debts. Unless you implement a clear credit control process, your business’ ability to grow and survive will be under threat.

The credit control process;
Signing up a client

This process is guided by the credit control policy in place. The policy states the conditions to be met by a client before they are allowed credit facilities. Some of these requirements include;

  1. Financial statements – A firm can ask a customer to supply financial statements. Rules of thumb based on calculated financial ratios can be used.
  2. Credit reports on customer’s payment history with other firms including CRB reports – Many organizations sell information on the credit strength of firms
  3. Banks – Banks will generally provide some assistance to their business customers in acquiring information on the creditworthiness of other firms.
  4. The customer’s payment history with the firm – The most obvious way to obtain an estimate of a customer’s probability of non-payment is whether he or she has paid previous bills with the company granting credit.
  5. The 5 C’s of credit:
  • Character – The customer’s willingness to meet credit obligations
  • Capacity – The customer’s ability to meet credit obligations out of operating cash flows
  • Capital – The customer’s financial reserves
  • Collateral – A pledged asset in case of default
  • Conditions – General economic conditions

After all the conditions are met a credit contract is signed.

The credit contract sets out terms of credit as agreed between the parties.

Client ordering for goods or services

The client then requests for goods or/and services as set out in the credit agreement. This is usually done by way of an LPO/LSO.

Servicing of the Client:

This is when the supply of goods/services is done and a delivery note or a job card is issued to the client.


This is the point at which credit management ‘proper’ starts. The invoice sent to the client has to be accurate and has to be sent on time since most clients start ageing their invoices for payment only when they are received and posted in their systems. In addition, most clients have a million and one reasons for not paying up in time. Don’t give them an extra reason by sending inaccurate or late invoices.

Credit collection:

It’s crucial to implement a clear and co-ordinated procedure for credit collection. Initially, you need to establish a realistic timetable, including all the stages that need to be completed and adhered to by various team members within your business. Your credit collection process may consist of the following:

  1. Establish the importance of prompt payment of invoices by politely reminding customers of the payment schedule when the order is fulfilled
  2. Send reminder letters on the day the invoice becomes overdue
  3. Send subsequent letters every 7 days if the invoice remains overdue
  4. After a specific period of time, it might be useful to pass the debt over to a reliable, commercial debt collection agency

Client Ledger Management

In this stage, the accountant in charge of maintaining clients accounts ensures that all invoices, credit and debit notes, payments and any discounts are appropriately posted and allocated to the relevant invoices. This process results in a clear customer statement and a clean debtors ageing report.


This is the most overlooked step. Its important to provide feedback to your clients. This step ensures that you keep on reiterating the terms of payment as agreed in the credit contract.

The cycle then starts all over again.

Key Factors for an effective credit management process
Know your customers and service them well:

No single client is similar to another. Each client is unique in their own way. It would be pertinent to manage the credit process with this in mind. In addition, debtors behavior keeps on changing depending on what is happening in their organisations. It would be imperative that the staff in-charge of debt collection, would monitor their debtor’s behavior over time so that they determine the most effective method to use for debt collection. For example some clients would require constant reminders to pay whereas some would pay even without a nudge. Others would prefer a call over an email reminder.

Set Credit Collection Targets for your Team:

Peter Drucker said that “What gets measured, gets done”. In line with the organisation performance management system, credit and sales staff should have a credit target. The target should be in terms of the number of days that it takes to collect a debt. The target should be evaluated and achievement rewarded and also caution and corrective measures should be taken. For the sales staff, its all about the quality of credit they extend. Their goal should not just to sell but they should participate in the concerted efforts of ensuring sales are realized through collection.

Establish a credit control Committee

Establishing a committee of persons to make decisions regarding credit is an essential control in reducing credit (and fraud) risk. If an individual has the power to decide who will receive credit, which debt will be written off, and the conditions for advancing credit, this power can easily be abused and covered up. While credit officers can serve on the credit committee, at least one other individual with greater authority should also be involved. The credit committee has the responsibility not only for approving credit, but also for monitoring the collection progress and, should debtors have payment problems, getting involved in debt collection process. 

Outsource Old Debts:

The older a debt gets, the chances of collecting it go down. Hence, its important to separate current debt and past-due debt. This ensures that the credit staff only concentrate on the current debts and hence improving the debt collection days.

Provide Various Avenues for Payment

Offering a variety of methods of payment makes it easier to get paid and avoids the delays and inconveniences by traditional methods of payment such as cheques.

You could offer the following:

  • Cheques
  • Mpesa
  • Credit/debit card
  • Cash

Join the conversation and let’s know what has worked and has not worked for you.

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Kagiko & Associates is proud to be an accounting firm that helps business clients make sound financial decisions daily. We are fully committed to helping you succeed by performing the critical accounting functions that keep you financially solvent and compliant with financial and Tax regulations.

Nairobi, Kenya
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