CREDIT MANAGEMENT

WHAT IS CREDIT MANAGEMENT?

Credit management refers to the most common way of  extending credit to your customers, which involves creating payment plans that enable them to pay their bills promptly and in full, collecting payments, and ensuring that clients (as well as employees) comply with your company’s credit policy.

It is estimated that 20% of small to medium businesses become insolvent due to customers not paying their invoices. This has a negative impact on the business’s reputation and reliability. Therefore, managing credit and debt is crucial for successful business operation.

When contemplating the meaning of credit management, it is important to understand that it is a plan put in place by your company to prepare for situations where customers make late payments or fail to make payments altogether.

To achieve credit success, the leadership employs a continuous and proactive approach to identifying potential opportunities, evaluating the actual risks involved, and taking appropriate measures to mitigate the inherent dangers of extending credit.

The importance of having a credit management policy is crucial:

The use of credit management strategies helps the credit department to function more efficiently. When policies and procedures are clearly defined, confusion is minimized regarding how to proceed.

Strategies for managing credit can provide clear guidelines regarding the amounts of loans, types of customers, the ratio of debt to post-tax income, insurance requirements, payment schedules, and interest rates.

The significance of credit control policy in managing credit:

Many providers have created credit teams to evaluate the credit risk associated with their clients’ portfolios. However, they need to determine how to assess the credit risk and what methodology to use for the assessment.

In order to address these questions, organizations create a plan for managing credit that serves as a framework for credit teams. While each organization has its own unique credit plan, a credit policy generally outlines clear guidelines for:

• The contracts for supplying products through layaway plans.
• Client capability models
• The dunning system
• In case a customer fails to make payments on time, there are certain measures that can be taken.

Making use of a structured credit approach ensures that the credit team is equipped with a standardized approach to manage a customer’s credit risk. This translates into consistent and reliable credit decisions, and eradicates the risk of inconsistencies, as there is a clear audit trail. Additionally, a credit approach helps facilitate the acquisition of new skills for the credit team, as they can effectively learn and apply guidelines for evaluating credit risk.

What steps can one take to develop a credit control policy that is effective?

Creating a credit control strategy that is simple yet effective may seem like a difficult task to tackle. However, there are five steps you can take in order to develop a credit strategy report for your business.

1. To begin with, it is essential to establish clear definitions for tasks, duties, and internal procedures. It is important to determine the internal credit control methods and effectively allocate them among employees or departments. You can accomplish this by breaking down each step of the credit control procedure, assigning roles and responsibilities to everyone involved, and visually representing this process through a framework chart.
2. To start with, you need to figure out the best way to evaluate your customer’s credit. Clarify the reasons for conducting credit checks, outline the credit check services you utilize, and ensure that credit evaluation is integrated into your business operations. This will prevent any sudden shocks if your customer’s credit score decreases.
3. Establishing agreements – You aim to provide additional information on the timing and manner in which clients should pay their bills. Some essential areas that your Terms and Conditions should address include payment conditions, credit facilities, fees for late payment, and debt collection methods.
4. To create a credit control and debt collection plan, it is essential to establish credit limits for each of your customers. This will ensure that you can minimize your risk as much as possible. You should have your clients sign a credit agreement and ensure that the credit limits you set are reflective of their individual credit status.
5. Provide instructions for payment methods – Ultimately, it is important to ensure that customers use appropriate payment methods. Determine your preferred options such as Direct Debit or Visa payment, and provide customers with all the necessary details such as account numbers and sort codes so that they may make payments.

What are the steps involved in devising a plan for managing credit effectively?

Describe how you manage your credit:

Begin by examining the current credit management services and methods employed by your company.

• Who has the responsibility of supervising credit: Is it a team? An individual? Or perhaps busy executives who may have the chance to make accurate credit decisions?
• What are the rules established that relate to the terms of payment or the procedure for handling late payments?

If you currently lack a structured credit and debt management plan, these are some key elements to begin with:

• Calculate the number of days it usually takes for you to receive payment from your customers, also known as Days Sales Outstanding or DSO, and compare it to the average in your industry.
• Make sure to confirm that you are paying your providers in advance of receiving payments. If this is true, you may need to modify how you charge and the terms of payment.
• Make sure you have a diversified client portfolio to avoid relying on one primary client for your income.

It is necessary for the entire company to become familiarized with the most effective methods of managing credit risks. This includes improving contract management and collections of accounts receivable, assessing the likelihood of new customers failing to make payments and implementing a plan to proactively mitigate credit risks. It is important to clarify the responsibilities for credit account management among various departments and hold individuals accountable for their actions.

Ultimately, your credit management strategy should find a balance between avoiding risk and seizing opportunities. Being overly cautious could mean missing out on potential transactions and growth opportunities, while being too lax could result in overlooking warning signs of a risky customer.

Establish client creditworthiness:

Playing an active role is crucial in credit management, especially in understanding the financial situation of your customers.

Attracting new customers is great for business, but it’s important to make sure they don’t become a burden. To avoid potential problems, it’s wise to assess their likelihood of failing to make payments by implementing a proactive plan for managing credit and debt. This is a crucial step in effectively managing finances.

Regardless, current clients should undergo periodic evaluation. Just because you have a strong relationship with a client doesn’t mean they are not vulnerable to default.

The offices and agencies that deal with commerce, credit, banks, and exchange can provide information about a client’s recent financial transactions and their current financial situation.

It is important to research the industry and market in which the client operates and compare their financial performance with that of similar businesses.

Managing credit becomes more complex when conducting business with new clients from foreign countries, as it can be difficult to decode and comprehend the financial information used by these countries to determine creditworthiness.

Include specific considerations for each country when conducting a survey for a global client, such as fluctuations in currency exchange rates, economic or political instability, the risk of international trade restrictions or embargoes, and similar factors.

Usually, reviewing financial reports is the best way to understand the financial situation of a company; however, some privately owned customers may not disclose these reports to you.

Provide documentation to assist in managing credit and debt:

When you are negotiating a deal with a customer, there are a few pointers that you should keep in mind:

• Ensure that your delivery and payment requirements are included in the agreement and that any provisions in the contract are clearly defined, such as which conditions are applicable and acceptable to you.
• Ask a lawyer to examine the situation once the agreement has been entered into.
• Describe how your clients typically make payments, their unique methods and preferences, and identify who needs to receive your invoices and ask for confirmation of receipt.
• It is important to get your receipt promptly after completing your work or receiving benefits. Make sure that the receipt clearly states the correct contact person, organization name, and address so it can be processed quickly. Ask the recipient to confirm that they have received your receipt.

In order to increase the likelihood of receiving timely payment, we recommend that your receipt includes:

• Please provide the name of your organization, along with its address, phone number, email address, and the name of the person to contact.
• The buying request reference.
• The type and quantity of the products or services.
• The cost in the proper cash.
• The settled upon payment period.
• Your payment subtleties.
• The conditions you agreed to are written on the back of the receipt.

As a result of the fundamental trustworthiness and responsibility of the executive, you should expect a reduction in the chances of payments being made late or not at all.

Keep an eye on how much your clients are paying:

Despite having various methods to handle payments, it is unfortunately not guaranteed that your customers will pay their bills within the designated time frame. This is where having a credit management strategy and credit management services become crucial once again. Keeping track of your clients’ payment progress to ensure they follow the agreed contract can help prevent unexpected surprises. It is important to evaluate each customer with a frequency that corresponds with the perceived risk they bring.

It is important to maintain good client relationships, so if there are late payments, refrain from immediately contacting a legal advisor. It is best to first reach out to the client and politely remind them that payment is expected within a reasonable timeframe. Remember to remain firm yet courteous in your communication.

In any scenario, if a receipt remains unpaid despite reminders for several months, it may be advisable to seek the assistance of a professional debt collector such as your trade credit insurer or a debt collection agency.