Credit Management

Credit control is a very important role within a company, this department has a vital effect on the company's cash flow. It will be worthless if the business has a high level of credit sales with a long-aged debtor list. This phrase was taken from R Bass "Credit, like the honour of a female, is of too delicate a nature to be treated with laxity - the slightest hint may inflict an injury which no subsequent effort can repair. "

To certain extent this statement is true, there can hardly be a credit man unable to quote from his own experience an example of the truth of this aphorism. The business conditions of the last decade have created problems with cash flow and interest charges never before encountered in the industrial post-war economy. Over those ten years, both large and small companies become to realise that the debtors on the balance sheet represent a very substantial and expensive consumer of capital employed.

They are also now beginning to accept that in total, debtors represent an investment in the marketplace on which the expected return is the profit to be earned once payment has completed the sale. At the same time, like all investments, those debtors are subject to the risks arising from the effect of the economic climate on that marketplace. In terms of net income, a company's sales operation does no more than transfer finished stock into debtors, thereby bringing closer to reality the notional profit to be earned.

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That profit ceases to be notional only when the sales proceeds are in the bank. However, it is in the very process of transferring the investment from stock to debtor that additional risk is incurred to profit realisation by potential erosion arising either from account delinquency or by bad debt. It is often said if the bad debt write-off is nil or very low the credit policy of the company is too restrictive, but this is only true if it can be shown that business has been last as a result. Bad debt should be kept to a minimum with the overall company sales objectives and forecast.

The effectiveness of credit management depends largely upon the persons responsible for the function. Many credit managers were poorly qualified, with little formal training, quite lowly paid and of relatively junior status. Maybe it is time for companies to revalue their credit control department, it is just as important as the sales, marking and production. Credit Management B Edwards cited a sensible directive to the credit management function is: "Find ways to take orders without taking unacceptable risks. "

In other words, progressive companies have a positive approach to accommodating their customer's need for 'time to pay', but do not neglect the costs of doing so in pricing and profit planning. In many companies there is no such person as a credit manager or credit controller. It usually falls to a member of the accounting staff to look after the sales ledger and to organise cash collection. Credit control is not regarded as his principle responsibility and all too often credit work is fitted in when time permits, or when a cash crisis occurs.

Many of the companies who do employ a full-time credit manager regard him as a debt collector of relatively low status in the hierarchy. It is very easy for the credit manager to be regarded as a negative figure whose purpose is to restrict sales, impose limits, demand money and stop deliveries. The status of the credit manager can only be improved by a more enlightened attitude by top management, recognising the potential contribution a professional credit manager can give.

The main task of credit management is to overlook the credit standing of both new and existing customers, the establishment of terms, having regard to the risk involved and the potential profit. Credit management is not just about debt collecting, collection of optimum cash flow whilst ensuring continuity of business. Methods of Credit Assessment When an individual applies for a loan or credit card, the bank or building society will carry out a credit check against the applicant, the credit score will give the lender a general picture of the applicant whether or not s/he can keep up the repayment.

It is a risk to issue credit to debtors, there is no guarantee that your customer is going to pay on time, or at all. So there is no reason why a company should not carry a credit check against its customers. An accurate credit check will increase corporate cash flow and profitability by reducing the level of bad debts and the number of accounts which are overdue. However, companies must attempt to strike a balance between a too conservative policy which might lead to the rejection of orders which are considered risky and accept orders where delays or default in payment are very likely to occur.

New customers represent the major decision area, but it is also important for companies to be vigilant regarding the continuing credit check of existing customers. Suppliers of goods face two types of credit risk:

• The risk that the customer will not pay at all
• The risk that the customer seriously delay payment

It is very unlikely that a large company such as a government department or a nationalised industry will result in bad debt, but it is well known that they take a substantial proportion of their time to settle their invoices.

This effect of slow payment could cause a serious cash-flow problem with small-medium size companies, or drive them into liquidation. Controlling Credit Risk A wide range of possible information sources is available to companies when carrying out a credit check to prospective customers. A Shavick cited the most widely used are trade references, bank references, credit agencies. Trade references provide a direct means of checking a prospective customer's current payment behavior, and it is normal for a supplier to ask for two trade references before credit is granted.

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