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What Is Credit Management? (& Why It Matters)

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Benjamin Franklin once wrote:

Remember, that money is of the prolific, generating nature. Money can beget money, and its offspring can beget more, and so on …. The more there is of it, the more it produces every turning, so that the profits rise quicker and quicker.

Benjamin Franklin, Advice to a Young Tradesman, Written by an Old One (1748)

This still holds true today, nearly 300 years later.

Many businesses struggle with managing credit and think it’s because they are too busy with their core work.

However, credit management can heavily influence their overall business performance, so it should also be considered a part of it.

Let’s take a look at what credit management is, why it matters and how you can improve it.

What is credit management?

Credit management is everything directly related to the processes of approving customers for onboarding, extending payment terms, setting credit and payments policy, issuing credit or financing and monitoring business cash flow. 

It is practiced by banks and businesses across all industries and markets. Best practiceslevels of risk and days sales outstanding (DSO) vary in each of these.

(This latter term – DSO – means the average time period. It is usually measured in how many working days it takes between a sale being made and the payment for that sale being received or collected.)

Businesses working in the B2B sphere, for example, often grant credit and also need to manage relatively slow payment cycles. This in turn affects their cash flow.

At its core, credit management is the caretaking of your company’s financial health. Good credit management can make the difference between a company surviving, thriving or going bankrupt.

58% of Accounts Receivables have set aside automation for manual processes due to current challenges.

Is credit management the same as collections?

Credit management and collections are not the same things. However, they are closely related to one another and are often managed by the same department.

In some cases, companies may control their own credit management but outsource their collection process.

This could be because they haven’t got the resources to focus on both, or because they believe a professional collections service is simply better at recovering their invoices and debts.

The main components of credit management

The four main components of credit management

Below is our list of the most important areas involved in good credit management.

1. Assessing and approving new clients

A good credit management system can quickly and effectively assess a customer’s financial situation.

Balancing these two competing requirements isn’t easy.

If the assessment process takes too long, there is a risk that the potential customer will find a new supplier. If it isn’t done to a high enough standard, there is a risk your business will take on bad debts.

2. Setting payment terms

This is the practice of deciding when invoices should be paid.

Companies often need to strike a balance between offering terms suitable for their industry and the cash flow issues and risks that longer terms bring.

3. Extending credit to existing customers

Extending credit covers multiple scenarios, including issuing credit notes and offering financing options to your customers.

It is often necessary if you want to retain business. And financing can bring extra benefits such as higher sales volumes and customer loyalty.

Credit terms can vary according to the credit or payment history of specific customers. Credit management decisions are critical when considering offering these services.

4. Tracking customer credit

An important function of credit management is the ability to monitor and prioritize your sales ledger.

This area may crossover into the realm of collections. For example, it might involve dunning, which is an important part of establishing the status of late payments.

What is a credit manager?

credit manager is someone responsible for overseeing the credit management process.

Credit managers usually have backgrounds in finance and/or business administration. They manage the assessment of multiple potential and existing customers simultaneously.

The role requires good analytical and communication skills. These abilities are essential to a company’s economic performance.

What is good credit management?

Simply put, good credit management involves ensuring all customers paying their invoices on time, within the terms and conditions.

That’s the ideal. In reality, it’s very unlikely all customers will pay all outstanding invoices in full and on time. This is why you need a good credit management program and team. 

The benefits of good credit management

Credit management is important because it reinforces a company’s liquidity. If done correctly it will improve cash flow and lower the rate of late payments.

It’s the difference between a high or low DSO, amount of bad debt a financial portfolio presents and even negative or positive customer relations.

4 Questions to evaluate your credit management process

4 Questions to help you evaluate your credit management process

We’ve pulled together a few questions to help determine the quality of your current credit management. 

1. How are you evaluating customer credit? 

When new customers apply for credit, you’ll need a system, manual or automated, to determine creditworthiness. Then a process in place to monitor it over time.

2. What is your invoicing process like?

This can also be manual or automated, paper or electronic. It’s important to keep in mind, nearly 1/3 of B2B organizations report that over 50% of their customers have unique invoice requirements.

3. Who handles the collections?

It’s inevitable that customers will fall behind on payments. You’ll need staff to track down payments and apply them correctly.

It takes on average more than 18 hours per week for a full-time employee to collect payments and more than four days to onboard new customers.

4. What is the role of your employees in this issue?

Reliance on manual A/R processes takes a human toll.

A/R teams struggle to keep up with the high volume of customer requests and disputes as well as the increasing amount of invoice and billing errors that require attention.

Do you need a third-party credit management partner?

If the above tasks are not within your core competencies, it’s time to consider credit management support.

Each question is interlinked and can be outsourced, or even automated in some cases, with an accounts receivable partner such as TreviPay. 

Choosing a Credit Management Provider

Once you’ve decided to seek a third party to help manage your credit program, look for a provider with a comprehensive service and platform.

It’s also important to find a partner who knows your industry well and can quickly analyze and improve your risk exposure.

TreviPay’s solution extends risk-free credit and automates A/R under your brand while providing protections against bad debt. We handle everything from underwriting the credit, onboarding and invoicing through to collections and more.

Conclusion

Good credit management is essential to maintaining or growing a sustainable business.

It is often associated with the collections process. They are linked and often take place in the same department but they are not the exact same thing.

Credit managers need to make quick but thorough assessments about onboarding new clients and extending credit. They also need to balance reducing risk with maintaining or increasing cash flow.

There are several ways you can evaluate your current credit management. These include following best practices for assessing customer credit, invoicing, collections and employee allocation.

In some cases, outsourcing your credit management to a third party can help you improve cash flow and better utilize internal resources.

Schedule a demo today to see first-hand how TreviPay can help your business grow.

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