Credit management

Credit management
Primary topic
Related topics
Methods and techniques

Credit Management is a branch of accountancy, and is a function that falls under the label of “Credit and Collection’ or ‘Accounts Receivable’ as a department in many companies and institutions. They will usually deal with the credit vetting of customers, the resolution of any invoice queries or disputes, allocations of payments or cash application, internal fund movements, reconciliations and also maintaining positive working relationships with customer during the debt collection or credit review and approval process.

Credit Management has evolved now from being a pure accounting function into a front-end customer facing function. It involves screening of customers and only those who are credit worthy are allowed to do business. A sound review of the financial position of the customer, and understanding of their business model is the first step in ensuring that the company does not end up selling to a customer who ends up seriously delinquent or in default. Hence, before the sales function commences its business with the particular customer, the credit management role begins. Later as the customer starts dealing with the company, the accounts receivable function is used to ensure recovery as per agreed terms of credit is followed (H.O. Moti, J.S. Masinde 2012).

The importance of credit management[edit]

Some companies do their utmost to bring in new business, but may falter at the last hurdle of ensuring that deals turn in to ‘paid deals’. Over half of all bankruptcies are attributed to poor credit management – signifying its importance. Credit management involves much more than reminding customers to pay. Rather, it involves gaining a thorough examination and process of detecting possible reasons of non-payment, perhaps even whether a solution or product was not delivered and even as far as the invoicing containing discrepancies (O. Chigozie, B.Ch. Okoli 2013).

Effective credit management is a comprehensive process consisting of:

  • Determining the customer's credit rating in advance
  • Frequently scanning and monitoring customers for credit risks
  • Maintaining customer relations
  • Detecting late payments in advance
  • Detecting complaints in due time
  • Improving the DSO
  • Preventing any bad debt from arising

Credit Management policy[edit]

This is an operational document defining a number of operating rules for the sales process that must be followed by the entire company including of course the credit team. The establishment of a procedure for credit management is necessary and critical in business since the number of employees exceeds ten and unwritten rules that are no longer appropriate. It defines the rules of operation at each stage of the sales process and clarifies the responsibilities in line with the business strategy (G. Donnelly, M. Ksedzova 2013).

Credit Manager[edit]

Person which intervenes in the full sales process of the company, from commercial prospecting to final payment of invoices. He works in collaboration with the sales department and the legal department. He is responsible for the good management of customer outstanding, that is to say the turnover recognized and not yet paid.

Credit risk[edit]

It is refers to the probability of loss due to a borrower's failure to make payments on any type of debt. Credit risk management is the practice of mitigating losses by understanding the adequacy of a bank's capital and loan loss reserves at any given time – a process that has long been a challenge for financial institutions. To comply with the more stringent regulatory requirements and absorb the higher capital costs for credit risk, many banks are overhauling their approaches to credit risk. But banks who view this as strictly a compliance exercise are being short-sighted. Better credit risk management also presents an opportunity to greatly improve overall performance and secure a competitive advantage.


References[edit]


Author: Maria Drzazga