What is Credit Management? How To Create, Benefit, 9 Facts

Protecting your business from late payments and consumer defaults is crucial. To do this, you need implement a credit management policy that is successful. What exactly is credit management, and what are its benefits?

From strategy to implementation, this article guides you through credit management step by step.

What is Credit Management?

Credit management is the process of extending credit to your customers, establishing payment terms and conditions to enable them to pay their bills on time and in full, collecting payments, and ensuring customers (and workers) adhere to your company’s credit policy.

What is Credit Management?

We estimate that one out of every five small to medium-sized business bankruptcies is the result of unpaid bills from consumers.

And this is the knock-on effect: the late payments of your clients affect your own creditworthiness. Credit and debt management are therefore crucial to the success of any organization.

Therefore, while asking, “What is credit management? Consider it your company’s action plan to protect against late payments and client defaults.

An good credit management strategy employs a constant, proactive process of detecting hazards, assessing their potential for loss, and proactively mitigating the inherent risks of granting credit.

One of the primary advantages of credit management is the ability to have a comprehensive picture of your company’s finances, enabling you to avoid undue credit risk and exploit possibilities.

However, there’s more. Additional benefits of credit management include:

  • Financial flow protection is the practice of ensuring that your cash inflows are always greater than your cash outflows, allowing you to pay your bills and staff on schedule.
  • Reducing the number of late payments By discovering them sooner and eliminating bad debts, you reduce the likelihood that a default may negatively affect your company.
  • Increasing available business liquidity.
  • Executing faster and more complete debt recovery.
  • Improving your company’s Days Sales Outstanding (DSO).
  • Identifying opportunities and freeing up your company’s working capital for critical business investments that can support strategic growth.
  • Helping you plan and analyse performance, which enables you to prepare financial budgets for the years to come.
  • Reassuring potential lenders who can fund your business expansion plans.

Examine your company’s present credit management methods and services in detail:

  • Who is in charge of managing credit: A team? An individual? Or executives who lack time to make precise credit decisions?
  • What are the rules in place connected to your payment conditions or late payment procedure?

If you do not currently have a credit and debt management procedure in place, you may begin with the following:

  • Calculate your average Compare your DSO (the average number of days it takes you to receive payment from clients) to that of your industry.
  • Check if on average you are paying suppliers before payments are coming in. If so, you may need to adjust your billing cycle and payment terms.
  • Maintain a healthy diversification in your customer portfolio so that you’re not relying on one big customer.

The entire organization should familiarize itself with best practices for credit risk management, which include optimizing contract management and accounts receivable collections, identifying and analyzing the risk of new clients defaulting on payments, and developing a proactive credit risk mitigation plan.

What is Credit Management?

Define the actions required in credit account management from other departments, and hold individuals accountable for them.

Lastly, your credit management method should seek a healthy balance between risk avoidance and opportunity capturing.

Being excessively careful may cause you to miss out on sales chances, while being too relaxed may cause you to overlook the warning indications of a potentially dangerous customer.

It is essential to be proactive while managing credit, especially when it comes to understanding your client’s financial situation.

New clients are a nice addition to any business, but make sure they don’t become a burden by identifying and analyzing their risk of nonpayment by developing a proactive credit risk mitigation plan. This is a crucial phase in the credit and debt management process.

Even established clients should be subjected to frequent evaluations. Even if you have an excellent connection with a customer, you cannot assume that they would never default.

Chambers of Commerce and credit bureaus, bank and trade references, etc., can disclose a customer’s current financial activity and cash flow situation.

Consider the customer’s unique industry and market, and compare its economic performance to those of closely similar sectors.

It can be difficult to analyze and comprehend the information utilized by other countries to determine creditworthiness, making it more difficult to manage credit while conducting business with overseas consumers.

Include country-specific credit risks, such as swings in currency exchange rates, economic or political instability, the possibility of trade restrictions or embargoes, etc., when evaluating an overseas customer.

In general, audited financial statements are the greatest approach to comprehend a company’s financial situation, however some privately owned clients may not be ready to share them with you.

A tool for assessing the creditworthiness of customers, such as EH TradeScore, and trade credit insurance can be beneficial. They provide indirect access to financial data and aid in credit and debt management.

Here are a few things to bear in mind while negotiating a contract with a client:

  • Ensure the contract includes your delivery and payment conditions and explains any provisions in the agreement, such as the applicable terms and your acceptance of them.
  • Ask a lawyer to review the conditions upon joining the agreement,
  • Clarify your clients’ payment procedures, Determine policies and eccentricities, as well as to whom you should send bills and request a receipt acknowledgment.
  • Invoice early, when labor is finished or services are rendered. Ensure that your invoice is sent to the correct contact, firm, and address so that it may be processed expeditiously. Request confirmation of receipt of your invoice from the receiver.

To maximise the chance your invoice will be paid on time, We suggest it includes:

  • Your company’s name, address, phone number, and email address, as well as the name of the contact person.
  • The purchase order reference number
  • The kind and amount of the products or services being purchased.
  • The amount in the specified currency.
  • The agreed-upon term for payment.
  • Your payment information.
  • Printed on the reverse of the invoice are your conditions.

Due to these basic credit and debt management recommendations, you should experience a decrease in the likelihood of late or missed payments.

What is Credit Management?

Unfortunately, despite these safeguards, you cannot ensure that your clients will pay their invoices within the agreed-upon timeframe.

Again, your credit management policies and services are vital. Monitoring your clients’ payment status to ensure they’re adhering to the terms of your contract might prevent unpleasant surprises. Review each consumer at a rate proportional to the estimated danger posed by that customer.

Due to the importance of maintaining excellent customer relations, do not immediately contact your attorney in the case of late payments. Start by personally phoning the consumer, and then send a pleasant but firm written reminder that payment is expected within a reasonable time frame.

Consider contacting a professional debt collector, such as your trade credit insurer or a debt collection agency, if an invoice remains unpaid after two to three months despite repeated warnings.

How to Develop a Strategic Credit Management Procedure for Late Payments

Ensure you have an efficient credit management policy for late payments, as not all clients pay their bills within the agreed upon payment term. In the case of late payments, call the customer and send a written reminder that payment is due within a week.

Then, if payment is still not received, you can issue a formal written notification. This normally requests payment within two business days and provides a deadline by which the money must be paid before legal actions can be initiated.

Consider increasing fees to account for collection and interest expenses, given the costs associated with late payments.

In the case that you agree to a payment plan for late payments, you must put the details of the arrangement in writing and include the following:

  • Total amount owed
  • The payment intervals
  • The dates by which specified contributions must be received.
  • If funds will be wired or sent electronically, include your bank account number and other routing information.

With a credit management system, you should also track the development of your customers. They are following the regulations, yes. Is it possible that they are on the edge of insolvency?

Additionally, notify your credit rating agency. The necessity of having a credit management mechanism in place is underscored by the fact that late payments by your customers might have an effect on your rating.

Being credit insured means that your carrier will manage follow-up and collections of late payments, which, in addition to saving you time and effort, may help you keep your connection with your customers by removing you from difficult talks.

Begin the Credit Management Process By Researching the Creditworthiness of Customers

We recommend investigating potential clients before to initiating communication in order to learn as much as possible about the firm with which you are negotiating.

Consider a variety of information sources for your consumer credit study, including the local chamber of commerce and credit agencies, bank and trade references, firm 10K, etc.

Even current consumers should be periodically evaluated. Important to the credit management process is being proactive throughout the research phase.

What is Credit Management?

Obviously, audited financial statements are the gold standard for knowing the financial status of your consumers. On request, some privately owned customers may be willing to provide you with this information, but the majority will not.

If you have a credit insurer, there is a greater chance that you will have indirect access to these statements.

Consumers appreciate the market power of an insurer, and insurers often issue confidentiality agreements to reassure customers that information would not be disclosed to the end customer.

Consult with one of our specialists to understand how accounts receivable insurance might assist your firm in protecting its assets and achieving confident growth.

Document and Evaluate Your Credit Management Process

Communicate your company’s credit management procedure to other departments to ensure that the jobs and responsibilities of personnel in other departments are understood by everybody. In some situations, they may be able to play a crucial role in collecting invoice payments.

In addition, establish explicit limitations on necessary tasks from other departments and hold individuals accountable. Periodically evaluate the extent to which your credit management approach fulfills the demands of the company.

Ensure that you assess each client at a frequency commensurate with the estimated risk posed by the customer and the likelihood of default.

Be wary about allowing personal ties to influence your judgment. Even if you have a positive connection with a client, there is no guarantee that they will not default.

Set Ambitious Customer Credit Management Goals

Underestimated is the benefit of an efficient credit management program, which, when executed properly, eliminates avoidable risks, generates improvement possibilities, and frees up your company’s working cash for vital business expenditures.

Therefore, it becomes sense to establish ambitious objectives and activities, assess your success occasionally, and make adjustments as necessary.

Listed below are some examples of objectives you might set for strategic credit management:

  • Determine the industry-wide average Days Sales Outstanding.
  • Reduce your Days Sales Outstanding (the average number of days invoices remain outstanding) to X days within a specific time frame (your findings from the objective above can help you determine a sensible benchmark).
  • Reduce bad loans and yearly depreciation.
  • Compare your performance to that of your colleagues in the business.
  • Maintain a well diversified buying portfolio.

Keep Improving on your Customer Credit Control Procedures

Credit management is not a one-time activity; keep this in mind as you implement these strategies and procedures. It’s a process you must work on over the entire year. With success, you may expedite invoice payments and optimize the working capital available to your firm.

This generates revenue that your firm may invest in the future and demonstrates the importance of excellent credit management to the whole organization.

Common Credit Control Policy Mistakes to Avoid

Many companies assume that their customers would behave in good faith and pay their invoices immediately upon receipt. Unfortunately, research indicates that up to one-third of companies pay their payments late.

While a portion of the blame lies with the client, your company may be committing the following correctable errors that are impeding its ability to invoice and collect money.

Using the Same Strategy for All Customers

Every organization has its own payment methods, regulations, and quirks. When you begin to do business with a new client:

  • Establish precise payment conditions and take the effort to comprehend how their practices coincide with your own.
  • Ensure that you have a formal agreement that defines all expectations and is signed. This makes it more difficult for a consumer to claim uncertainty or misunderstanding as a justification for nonpayment.
  • Determine if any special information or processes must be provided or followed when billing.
  • Whom to contact for late payments or other issues.

What is Credit Management?

Inefficient Invoicing

If you want to get funds quickly, you must rapidly send out invoices. Invoices should appear as soon as possible following delivery, when customers are most open to paying.

Ensuring that invoices are comprehensive and sent to the proper persons will also make them more difficult to disregard.

Passive/Antagonistic Payment Management

Customers’ late payments might be difficult to manage. If you are too passive and give consumers a pass, you will lose income, establish a poor precedent, and encourage them to disregard you.

However, imposing late fees and interest, interrupting delivery, sending debt collectors, or threatening legal action can turn off clients and cost you business.

Be forceful yet kind while collecting money. Include your sales staff and account managers in the process and be prepared to pick up the phone. When a consumer pays, always write a thank-you note to acknowledge receipt and continue a positive connection.

What are the skills of credit managers?

Successful credit managers must possess excellent analytic abilities, a thorough understanding of statistics, and the highest assurance when making judgments that may influence a company’s bottom line. In addition, they require the following talents.

Customer Service

Credit managers and collection agents serve as customer care representatives. They provide support to present and prospective clients by answering questions and resolving issues, as well as by offering excellent service.

It is crucial for credit managers to cultivate and maintain excellent connections with clients so that they continue doing business with the organization.

Communication

Credit managers must possess effective communication abilities. After all, inefficient communication may result in ineffective collections, customer service, and choices, which can have a negative influence on cash flow.

For this reason, it is crucial for credit managers to have clear and firm communication and to create clear expectations so that both internal and external client relationships stay strong.

Negotiation

Credit managers frequently have enough knowledge to make an informed decision that will benefit the firm as opposed to exposing it to needless risk. Remember that bargaining applies to internal customers as well, since you will want to make your coworkers pleased.

Strong negotiators are required to be customer- and people-focused, to have a genuine interest in dealing with both external and internal customers, and to devise solutions that satisfy everyone without harming the organization.

Legalese

Even though most businesses have an internal and external legal team, having a working knowledge and awareness of local, state, and federal regulations may assist credit managers avoid unintentionally incurring liabilities for a business.

Before moving through with a decision, credit managers should consult a company’s legal department if they have any doubts.

How do credit managers make decisions?

Credit Managers evaluate information from several sources in order to make informed credit judgments. Credit management teams will do an analysis after collecting information from a prospective buyer’s bank, credit bureaus, and trade references.

This study may include a calculation of the possible buyer’s business viability, which indicates the likelihood that the buyer will still be in business when payment is due.

The study may also include a record of their company’s credit expenditures. The objective of credit managers is to lower the total risk of cash flow constraints for their own organization.

How does collections relate to credit?

Frequently, a single department is responsible for both credit and collections. Credit managers attempt to establish credit conditions such that purchasers would be ready and able to pay on time, but when they fail to do so, collections efforts commence.

And similar to credit managers, collection professionals benefit from having solid communication, customer service, and negotiating abilities.

Credit managers establish the parameters for collection efforts when they initially extend credit to purchasers, and they direct the different enforcement measures that collectors will use to generate income for the business.

Days Sales Outstanding (DSO) and % overdue are key indications of the credit and collections department’s performance.

In order for the buyer’s line of credit to be renewed and for them to be able to place more orders, a critical job of the collection agency or collection department is the prompt payment of past-due invoices.

Once more, customer service abilities will be of paramount importance. In addition, a business that is unable to collect from its clients may record bad debts on its financial sheet.

What is Credit Management?

How to improve credit management

Credit Decisioning and the management process can be accelerated by accounts receivable automation technologies, while better choices are produced. In two methods, this is accomplished:

Automating the onboarding process: The manual collecting of credit application information, bank references, credit bureau reports, and trade references is a cumbersome and time-consuming procedure that requires the collaboration of several parties. Automation technologies may cut onboarding time from weeks to days by expediting material collecting.

Artificial Intelligence powered credit analysis: AI can take into consideration a vast array of data, including as business viability ratings, market intelligence, and global economic trends, to anticipate the possibility of future payments more precisely and expeditiously than credit managers who lack AI support.

Conclusion

Credit management is a word used to describe accounting tasks that are often performed under the Accounts Receivable umbrella.

This set of operations entails qualifying the extension of credit to a client, monitoring the receipt and reporting of payments on outstanding bills, initiating collection actions, and resolving disputes or questions regarding charges on a customer invoice.

Credit management is a wonderful approach for a corporation to maintain its financial stability when it is working properly.

5/5 - (1 vote)
Pat Moriarty
Follow me

Leave a Comment