What it means
Selling on credit means your customers hold your cash. Credit control is the discipline that decides how much of your cash they hold, and for how long, and it is measured most commonly by debtor days, also called days sales outstanding.
The cycle has five practical stages. They are assessing new customers before granting credit, setting and reviewing limits, issuing invoices that are correct and reach the right person, systematic chasing before and after the due date, and escalation to a formal process for accounts that stop responding.
Most of the value sits earlier than people expect. A large share of late payment is caused by invoicing problems such as a missing purchase order number, the wrong entity name or delivery to a person who left, so accurate invoicing and a courteous call a few days before the due date prevent more delay than any amount of chasing afterwards.
The financial effect is direct and immediate. Every day of debtor days you remove releases roughly one day of sales in cash, permanently, and that cash reduces overdraft interest or funds growth without any new borrowing.
Credit control also has a relationship dimension that is easy to get wrong in either direction. Chase too aggressively and you damage accounts worth keeping; chase too softly and customers learn that you are the supplier who can safely be paid last.
A consistent, documented and unemotional process handles both problems better than individual judgement calls.
In practice
Real-world examples
Example 1
A commercial cleaning company introduces a courtesy call five days before each invoice falls due. Debtor days fall from 52 to 41 within a quarter, mainly because purchase order and contact errors are caught before they cause a delay.
Example 2
A print business puts any account more than 20 days overdue on stop, with a written escalation to the customer's finance director. Two chronic late payers move to paying on terms, and one is transferred to a payment plan rather than being lost.
Example 3
A software reseller switches its largest customers to direct debit on the invoice due date in exchange for a 1% discount. Predictability improves so much that it reduces its overdraft facility, saving more in fees than the discount costs.
Think of it
Think of credit control like lending a book to a friend with the agreement they'll return it in a week. You choose which friends to lend to based on their past behavior of returning books and remind them as the return date approaches.
Formula
Calculation
Days sales outstanding = (Accounts receivable / Annual credit sales) x Number of days in the period. Cash released = (Old days sales outstanding - New days sales outstanding) x Daily credit sales.
Take a business with annual credit sales of $7,200,000 and accounts receivable of $900,000, using a 360-day convention for simplicity. Daily credit sales are $7,200,000 / 360 = $20,000. Days sales outstanding is ($900,000 / $7,200,000) x 360 = 0.125 x 360 = 45 days.
Suppose tighter credit control cuts this to 35 days. Receivables would fall to 35 x $20,000 = $700,000, releasing $900,000 - $700,000 = $200,000 of cash on a one-off basis. If the business is paying 9% on its overdraft, that also saves $200,000 x 0.09 = $18,000 of interest every year, achieved without a single extra sale.Case study
Seen in the real world
This case is fictional and illustrative. Pennfield Signage, an invented manufacturer of retail signage, was profitable but permanently short of cash, running at 45 days sales outstanding on $7,200,000 of annual credit sales and sitting near the limit of its overdraft.
The illustrative finance director changed four things: invoices were issued the day of despatch instead of weekly in arrears, every invoice carried the customer's purchase order number, a chase schedule ran at seven days before due, on the due date and at seven days overdue, and accounts above 30 days overdue went on stop unless a director approved otherwise.
Within two quarters days sales outstanding fell to 35, releasing $200,000 of cash and cutting overdraft interest by around $18,000 a year at 9%. No customer was lost, though two were moved to shorter terms. The board's illustrative conclusion was that the improvement came almost entirely from process and consistency rather than from tougher conversations.
Watch out
Common mistakes
- Starting the chase only after an invoice is overdue. Most of the delay has already happened by then, and a short pre-due contact resolves the disputes and paperwork errors that cause it.
- Leaving credit control to whoever has spare time. It needs a named owner, a written escalation path and a weekly ageing review, or it quietly stops happening during busy periods.
- Judging performance on the total receivables figure alone. A growing balance can be perfectly healthy if sales are growing, which is why days sales outstanding and an ageing analysis are the meaningful measures.
Questions
People also ask
What is a good level of days sales outstanding?
It depends on your terms and sector, but a common benchmark is your standard terms plus about a third, so 30-day terms should produce something close to 40 days in practice.
Should we charge interest on late payment?
Having the right in your terms is valuable as leverage, though many businesses invoke it selectively, because the credible threat often achieves more than the charge itself.
When should an account be passed to a collection agency or solicitor?
Usually once it is well beyond terms with no agreed payment plan and no genuine dispute, commonly around 90 days, since recovery rates fall sharply as the debt ages.