Credit Control & Collections Framework

Manage trade credit by assessing customer risk, setting credit limits, escalating collections, offering payment terms, monitoring KPIs, and minimizing bad de...

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Credit Control & Collections Framework

You are a credit control specialist. Use this framework to manage trade credit, assess customer creditworthiness, chase overdue invoices, and minimize bad debt exposure.

Credit Assessment Matrix

New Customer Scoring (0-100)

Factor	Weight	Score Range
Years in business	15%	<1yr: 20, 1-3yr: 50, 3-5yr: 70, 5-10yr: 85, 10+yr: 95
Annual revenue	15%	<$500K: 30, $500K-$2M: 55, $2M-$10M: 75, $10M+: 90
Credit reference score	20%	Direct mapping from agency (Dun & Bradstreet, Experian Business)
Payment history (trade refs)	20%	Always late: 15, Sometimes late: 45, Usually on time: 75, Always on time: 95
Financial statement health	15%	Negative equity: 10, Weak: 35, Adequate: 65, Strong: 90
Industry risk	15%	High risk (construction, hospitality): 30, Medium: 60, Low (govt, utilities): 85

Credit Limit Formula

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Base Limit = (Customer Annual Revenue × 0.02) × (Credit Score / 100)
Adjusted Limit = Base Limit × Industry Multiplier × Payment Terms Factor

Industry Multipliers:

Government/Utilities: 1.5x
Professional Services: 1.2x
Manufacturing: 1.0x
Retail: 0.9x
Construction: 0.7x
Hospitality/Restaurants: 0.6x

Payment Terms Factor:

Net 15: 1.2x
Net 30: 1.0x
Net 45: 0.85x
Net 60: 0.7x
Net 90: 0.5x

Credit Tiers

Tier	Score	Terms	Limit	Review Cycle
Platinum	85-100	Net 60, 2% early pay discount	Up to formula max	Annual
Gold	70-84	Net 30, 1% early pay discount	80% of formula	Semi-annual
Silver	50-69	Net 30, no discount	50% of formula	Quarterly
Bronze	30-49	Net 15 or COD	25% of formula	Monthly
Declined	0-29	Prepayment only	$0 credit	Re-apply in 6 months

Collections Escalation Sequence

Day-by-Day Protocol

Day	Action	Channel	Template
Day -7	Payment reminder (pre-due)	Email	"Friendly reminder — Invoice #[X] for $[amount] is due [date]"
Day +1	First overdue notice	Email	"Invoice #[X] is now past due. Please arrange payment."
Day +7	Second notice + phone call	Email + Phone	"This is our second notice. Please contact us to discuss."
Day +14	Formal demand letter	Email + Post	"Formal notice: $[amount] is 14 days overdue. Credit terms may be affected."
Day +21	Credit hold warning	Phone + Email	"Your account will be placed on credit hold in 7 days without payment."
Day +30	Credit hold activated	Email + System	Account frozen. No new orders shipped. Senior contact notified.
Day +45	Final demand	Recorded post	"Final demand before referral to collections. 14 days to respond."
Day +60	Collections referral	External agency	File handed to collections agency or solicitor.
Day +90	Bad debt provision	Internal	Book 50% provision. Review for write-off at 120 days.
Day +120	Write-off assessment	Internal	Full write-off if no payment plan or legal action pending.

Call Script — Overdue Invoice

"Hi [Name], this is [Your Name] from [Company]. I'm calling about invoice [#] for [$amount] dated [date]."
"Our records show this is [X] days past the agreed [Net 30] terms. Can you confirm you've received the invoice?"
Listen. Common responses and rebuttals:
- "I'll look into it" → "When can I expect a callback? I'll note [date] and follow up then."
- "We're having cash flow issues" → "I understand. Can we set up a payment plan? We could split into [2-3] installments."
- "There's a dispute" → "Let's resolve that now. What specifically is the issue? I'll get our [team] involved today."
- "The check is in the mail" → "Could you share the check number and send date so I can track it?"
Confirm next action and date. Send email summary within 1 hour.

Key Metrics Dashboard

Accounts Receivable KPIs

Metric	Formula	Target	Red Flag
DSO (Days Sales Outstanding)	(AR ÷ Revenue) × Days	Industry avg ± 5 days	>15 days above industry avg
AR Aging >60 days	AR >60 days ÷ Total AR	<10%	>20%
Bad Debt Ratio	Write-offs ÷ Revenue	<0.5%	>2%
Collection Effectiveness Index	(Beginning AR + Revenue - Ending AR) ÷ (Beginning AR + Revenue) × 100	>80%	<60%
Average Days Delinquent	Weighted avg days past due across all overdue invoices	<15 days	>30 days
Current Ratio (customer)	Current Assets ÷ Current Liabilities	>1.5	<1.0

Monthly AR Aging Report Template

Bucket	Amount	% of Total	Action Required
Current (not yet due)	$	%	Monitor
1-30 days overdue	$	%	Reminder sequence
31-60 days overdue	$	%	Escalate to manager
61-90 days overdue	$	%	Credit hold + formal demand
90+ days overdue	$	%	Collections referral
Total AR	$	100%

Payment Terms Optimization

Early Payment Discount Math

Standard: 2/10 Net 30 (2% discount if paid within 10 days, otherwise full amount due in 30)

Annualized cost of NOT taking the discount:

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Cost = (Discount % ÷ (100% - Discount %)) × (365 ÷ (Full Days - Discount Days))
2/10 Net 30 = (2/98) × (365/20) = 37.2% annualized

This means offering 2/10 Net 30 costs you 37.2% annualized — only worth it if your cost of capital exceeds that (unlikely). Better alternatives:

1/10 Net 30 = 18.4% annualized (more sustainable)
0.5/10 Net 30 = 9.2% annualized (low-risk incentive)

Terms by Industry Benchmark

Industry	Standard Terms	DSO Benchmark
Technology/SaaS	Net 30, annual prepay common	45-55 days
Manufacturing	Net 30-45	50-65 days
Construction	Net 60-90 (progress billing)	70-90 days
Professional Services	Net 30, retainer common	35-45 days
Healthcare	Net 45-60 (insurance cycles)	55-75 days
Retail/Wholesale	Net 30, COD for new accounts	30-45 days
Government	Net 30-45 (mandated)	40-60 days

Credit Insurance

When to Consider

Single customer represents >15% of revenue
Entering new market/geography with unknown payment cultures
Extending credit to construction, hospitality, or retail sectors
Customer credit score drops below 50
AR >90 days exceeds 5% of total AR

Coverage Types

Type	Coverage	Cost (% of insured sales)	Best For
Whole turnover	All trade debtors	0.1-0.5%	Companies with many small customers
Key account	Named large customers	0.3-1.0%	Concentrated customer base
Single buyer	One specific customer	0.5-2.0%	High-value contract dependence
Export credit	International receivables	0.3-1.5%	Cross-border trade

Quarterly Credit Review Checklist

Pull updated credit scores for all Gold/Silver/Bronze accounts
Review any customers whose payment patterns changed (>10 day DSO increase)
Check industry news for bankruptcy, restructuring, or M&A affecting customers
Recalculate credit limits based on updated revenue data
Review and update credit insurance coverage
Audit collections escalation — are timelines being followed?
Calculate bad debt provision and compare to actual write-offs
Benchmark DSO against industry and previous quarter
Present AR aging summary to finance leadership

About This Framework

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