Credit Management and Collections

Selling is easy. Getting paid is the business. Credit management decides who you sell to on terms; collections gets the money in.

Credit exposure

Open AR (invoiced, unpaid)                      420,000
+ Delivered, not yet invoiced                    85,000
+ Confirmed orders, not yet delivered           210,000
+ Open quotations (optional, usually excluded)        0
+ Bills of exchange / notes receivable            5,000
− Credit insurance coverage                    (150,000)
− Letters of credit / bank guarantees            (50,000)
− Security deposits / advance payments           (20,000)
──────────────────────────────────────────────────────
= Net credit exposure                           500,000
                          vs credit limit       450,000  → OVER

The three “not yet” lines are why exposure is not just AR. A customer with a clean AR balance and 300,000 of orders in the pipeline is already exposed.

Credit control area

The organisational unit that owns credit limits. Can span several company codes, because a group customer’s exposure is across all your entities, not per entity.

credit_master(
  payer_id, credit_control_area,
  credit_limit, currency,
  risk_category,              -- LOW | MEDIUM | HIGH | BLOCKED
  check_rule,
  horizon_days,
  last_review_date, next_review_date,
  external_rating, internal_score,
  insured_limit, insurer,
  blocked, block_reason
)

Note: the limit is on the payer, not the sold-to. A retail chain with 60 ship-tos has one limit at head office.

Credit check types

Static check

exposure + this order value > credit limit → block

Simple, and what most companies actually use.

Dynamic check

Only counts exposure within a horizon (e.g. the next 60 days). Orders scheduled beyond it don’t consume the limit yet. More forgiving, more realistic for long lead-time businesses.

Additional checks

| Check | Blocks when | |—|—| | Oldest open item | Anything overdue by more than N days | | Maximum overdue amount | Overdue balance exceeds a threshold | | Maximum document value | A single order above X, regardless of limit | | Payment behaviour / DBT | Average days beyond terms exceeds a threshold | | Number of dunning notices | Customer at dunning level 3+ | | Next review date passed | Credit review overdue — a control on the credit team | | New customer | No history, requires prepayment or manual release |

When the check runs

All three, and this matters:

1. Order save — before you commit to supplying
2. Delivery creation — exposure may have changed since the order
3. Goods issue — the last moment before value leaves the building

A customer can pass at order and fail at goods issue because they went 40 days overdue in the meantime. Checking only at order entry is a common and expensive gap.

Blocked documents and release

Order fails credit check
      ▼
Credit block set (order cannot be delivered)
      ▼
Appears in credit manager's worklist
      ▼
Options:
  - Release (documented reason, audit-logged)
  - Release with a temporary limit increase
  - Request prepayment / LC / guarantee
  - Reject the order

Every release must be logged with who, when, and why. This is a standard audit test. Releases without documented reasons are an internal-control finding.

Risk scoring

Inputs to a credit score:

Source	Signal
Payment history with you	Average days beyond terms, trend, dispute frequency
External bureau	D&B, Creditsafe, Experian, local agencies
Financial statements	Current ratio, gearing, interest cover, trend
Public filings	Late accounts filing is a strong distress signal
Legal	Judgements, liens, insolvency filings
Trade references	Other suppliers’ experience
Behavioural	Sudden order-size increase, changed payment pattern, requests to extend terms

That last row is worth building: a customer whose orders suddenly double while their payments slow is the classic pre-insolvency pattern. An alert on it pays for itself.

Collections

Segmentation

Not every overdue invoice deserves the same treatment.

High value + low risk     → gentle reminder, protect the relationship
High value + high risk    → senior collector, phone calls, escalate fast
Low value + low risk      → automated email sequence only
Low value + high risk     → automated, then write off — chasing costs more than it recovers

Dunning

Systematic escalation. See Accounts Receivable for the mechanics.

Level  Days  Action
1      +7    Automated reminder email with a payment link
2      +21   Firmer letter, copy the sales rep
3      +45   Final notice, order block, interest charged
4      +60   External agency or legal

Configuration: grace days, minimum amount to dun, per-customer dunning procedure, dunning blocks (for disputed items), and whether interest is charged.

Collector worklist

Prioritise by expected recovery, not by amount:

priority_score = amount_overdue
               × probability_of_recovery
               × urgency(days_overdue)
               ÷ effort_estimate

Track: promises to pay (and whether they’re kept — a broken promise is a strong signal), contact history, dispute linkage, and next action date.

Disputes

An overdue invoice is often not a payment problem — it’s a delivery, pricing, or quality problem. Route disputes out of collections into resolution, with a reason code and an owner outside finance.

Common reason codes: short shipment, damaged goods, price discrepancy, missing PO number, wrong ship-to, promotional allowance not applied, invoice never received.

The reason code distribution is a free operational audit. If 40% of disputes are “price discrepancy”, your pricing or your contract management is broken, and collections is just where the symptom shows up.

Risk mitigation instruments

Instrument	How it works
Credit insurance	Insurer covers a % of losses; they also set limits per customer, which becomes your de facto limit
Letter of credit	Bank pays on presentation of compliant documents. Dominant in export trade. Document accuracy is everything — a typo in the LC documents means non-payment
Bank guarantee / standby LC	Bank pays if the customer doesn’t
Factoring	Sell receivables. Recourse (you carry the risk) or non-recourse (they do)
Supply chain finance / reverse factoring	The buyer arranges early payment for suppliers at their own credit rate
Cash in advance / prepayment	Zero risk, hardest to sell
Consignment	You keep title but carry inventory risk instead
Retention of title (Romalpa clause)	Title stays with you until payment. Legally effective in some jurisdictions, weak in others once goods are commingled or processed

Letters of credit in ERP

For export businesses (very common in Bangladesh RMG, agriculture, and commodities), the LC drives everything:

lc(id, customer_id, lc_number, issuing_bank, advising_bank,
   amount, currency, expiry_date, latest_shipment_date,
   terms, documents_required[], tolerance_pct,
   amount_utilised, status)

Constraints the ERP must enforce: cannot ship after the latest shipment date, cannot exceed the LC amount plus tolerance, partial shipments allowed or not, transhipment allowed or not, and every required document must be produced exactly as specified. A discrepancy means the bank can refuse payment — so this is a hard block, not a warning.

Back-to-back LC: the export LC from your customer is used as collateral for an import LC to buy your raw materials. Ubiquitous in Bangladesh garment manufacturing, and it makes the LC register a core ERP object rather than a finance side-note.

Metrics

Metric	Formula	Target
DSO	(AR / revenue) × days	Lower, near terms + a few days
Best possible DSO	(current AR / revenue) × days	The floor
DSO delta	DSO − BPDSO	The collectable opportunity
ADD	Average days delinquent	Lower
CEI	Collection effectiveness index	>80%
% current	Not-overdue AR / total AR	>90%
Bad debt %	Write-offs / revenue	Industry-dependent
Dispute resolution time	Days open	Lower
Credit block release time	Hours	Lower — blocks stop shipments

That last one matters operationally: an order blocked for credit is an order not shipping. If releases take two days, credit management is costing revenue.

Developer notes

1. Exposure is a calculated figure across several documents. Materialise it per payer, update transactionally, and rebuild nightly to catch drift.
2. Check at order, delivery, and goods issue.
3. Releases are audited. Who, when, why, and what the exposure was at the time.
4. Credit control area may span company codes — don’t model the limit per legal entity.
5. Never let a credit-service outage stop order entry. Degrade to “pending credit review”, not to refusal.
6. Disputes belong in their own object with reason codes, not as a note on the invoice.
7. If you serve exporters, the LC register is a first-class object with hard blocking rules on shipment.

Next

• Returns and RMA
• Accounts receivable