Commercial finance glossary
Credit management
Many businesses only think of credit management in terms of the action required when customers fail to pay on time. This is in fact debt management and the duties of credit managers are very different.
A branch of accountancy that falls under the remit of Accounts Receivable, credit management is actually a practice that comes into play well before crisis point.
How to manage credit
The key to good credit management is creating a well-defined policy that reflects the strategic and operational objectives your business requires from its credit sales.
Does your business need to simply increase the number of sales, improve profitability or attract new and different customers?
Once these questions have been answered and strategic objectives identified, in order to manage credit successfully, operational procedures and policy have to be established; trading terms, vetting controls, credit supply limits and invoice management systems.
The finer points of credit management
It's particularly important to consider the finer details of your credit terms:
- Will you charge interest on late payments?
- What will you require for a credit check?
- What is the maximum length of time you will provide credit for?
By answering these and other questions around your credit management policy you make your position much less precarious than it might otherwise be.
Credit managers within smaller businesses may feel that not all of these requirements need addressing but as their operation will be in a more financially sensitive position than that of their larger counterparts, careful credit management is especially important.
While it requires careful thought and planning, the benefits of good credit management practice are not to be under-estimated as they will minimise the exposure of a business to the risk of bad debt and consequently bankruptcy.
