The Management Of One Of Business' Most Valuable Assets

Credit Management is the management of one of the business' most valuable assets - its receivables - this starts from the assessment stage right through to collection.

Effective Credit Management yields a substantial pay back in reduced borrowing, interest saved and improved liquidity. It is not simply a "debt chasing" exercise as it is often referred to.

Credit Management depends on the creation and implementation of a credit policy which establishes systems and procedures for opening accounts; defining the credit worth of the customer; establishing the terms on which goods or services will be supplied; and collecting payment when it is due.

Let us now look at three (3) areas in the Credit Management process:

? Credit assessment;

? Monitoring and controlling amounts outstanding on the sales/account receivables ledger;

? Ensuring the supplier is paid for the goods and services rendered

Credit Assessment

This is the stage at which the credit granting decision is made. It is a decision-making process and the decision is crucial, for it is at this stage that offers an opportunity to minimize the risk of bad debt.

The potential creditor needs to gather and then needs to evaluate the information in order to make a decision as to whether it is prudent to grant credit. There are many sources of credit information with varying levels of value. However, establishing credit worth is like doing a jig-saw puzzle and these sources are merely parts of the puzzle. It is only when they are put together that a picture emerges.

The objective of credit assessment is to establish the identity of the customer and that customer's ability to pay. Establishing the correct identity i.e. the correct legal status of the customer is the essential prerequisite to grating credit. The potential customer may be a Public Limited Company; Private Limited Company; Sole Trader; Partnership; Government or Local Government Body; Club; Church, or an Individual.

Account Monitoring - credit limit

After the evaluation of the potential customer, some suppliers normally apply a credit limit. It is not easy to determine absolute credit limits for customers. The answer can only be an estimate because of the many unknown factors, not least the change in the customer's liquidity since the last set of accounts if the customer is a business.

Having credit limits gives suppliers the opportunity to reassess customers on a regular basis. If there was no limit no brake will be placed upon the account at any stage. When credit limits become inadequate they should be updated.

Cash Collection

The granting of credit means taking a risk. There is no guarantee that goods and services received on credit terms will be paid for or paid on time. All suppliers must therefore have procedures which encourages the customer to repay as agreed, hence a cash policy.

A developed cash policy is essential if sales are to be turned into cash at a rate which enabled current liabilities to be met promptly. Preparing a collection policy must include recognition of needs for;

? Flexibility to cope with varying sales levels in varying economic climates e.g. during a recession.

? Priorities which will support the central objective of maximizing debtors for the shortest possible time e.g. key customers, special terms, marginal sales, cash only.

? Adequate in-house liaison particularly with production, sales, computer and dispatch departments. Essential where credit limit observance is required and marginal business is necessary.

There you have it in a nutshell - insights into Credit Management.

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