Guidelines for effective credit management

Guidelines for effective credit management

Effective management of accounts receivable includes not only evaluating and authorizing trade-credit extensions but also constantly supervising your credit customers’ accounts. In routine cases, this means enforcing credit terms and ensuring that payment discounts are taken only if deserved and that payments are made promptly according to the terms granted.

WARNING: The volume of accounts receivable must be carefully managed. Otherwise, it can grow to such a point that your company will lose significant profits as customers use its funds free of charge. Even the best credit risks may take advantage of a supplier that is lax in collecting its accounts.

Potentially more damaging is that a customer with a significant outstanding balance may fail. In that event, you may collect nothing. Even if some portion of the account is eventually paid, eventually can be much too long for the smaller company to wait.

Credit management is a complex function that requires a thorough knowledge of the industry and a good deal of tact. Unfortunately, it is also usually conducted with a limited amount of information. In contrast to commercial bankers, who are constantly in touch with their clients, credit managers receive reports infrequently – and usually after a delay. The horse is out of the barn before the credit manager learns the door might be open.

Components of credit management function

The credit management function has two components.

The first is how to decide whether to grant a credit request from a marginal customer. Requests from good customers or from clearly bad ones do not require much analysis.

The second is a method for evaluating accounts-receivable management, using aggregate data that may be more easily available to an outsider.

The credit manager may find these data helpful when reviewing a customer’s credit worthiness. From the same data, a business owner can learn how the company’s suppliers and bankers might be using and misusing information about the firm’s receivables.