Credit management is an essential process for any individual or business that requires access to funds. It involves the careful monitoring of credit accounts, the collection and repaying of loans and payments, the allocation of available credit to different credit accounts, and the timely retrieval of funds when it becomes needed. Credit management is also the procedure of evaluating credit, establishing the terms under which it is given, recovering that credit if it becomes overdue, and ensuring compliance by business credit policy with respect to the various credit transactions. This entire process involves the collection of data relevant to credit management as well as the determination of credit risk – that is, how likely a borrower will default on a loan or engage in other financial transactions that are unprofitable to the business. As such, the performance of a company in its financial arena is closely tied to its ability to manage its credit portfolio.
The effectiveness of credit management can be measured through the frequency with which it occurs. A company that consistently makes and pays its bills on time has shown that it has effective credit management. Also, a company that makes payments on time and does not experience any late payments will have demonstrated that it takes its responsibility to financial obligation seriously. Another indicator of effective credit management is a high level of customer satisfaction. A survey of customer satisfaction showed that those businesses with successful credit management practices were more likely to experience quick and reliable paybacks and were more likely to prevent or delay the initiation of late payments by their customers.
A company’s failure to manage its credit portfolio may stem from several sources. Delayed payments caused by economic uncertainty may result in late payments on accounts receivable. The inability to collect accounts receivable results in late payments on accounts payable. A company’s inability to generate sales leads may also result in insufficient funds for accounts receivable funding. The inability to collect accounts receivable results in the company incurring interest and late charges on accounts payable.
There are many different techniques available to help a business to implement an effective credit management plan. One of the most effective strategies is to implement a procedure called cash flow forecasting. Through this procedure, a company determines both the timing of its cash flow generation and the amount of cash flow it will require in order to support its operations and purchases.
A third way that a company can demonstrate its effectiveness in its credit management process is to effectively manage its accounts receivable. Through an effective accounts receivable financing plan, a company demonstrates its ability to generate cash quickly. This method is helpful to a business because it prevents the accumulation of customer credit card debt. Through an effective credit management process, a company is also able to increase the amount of customer credit lines when a company receives an advance on the credit line. This enables the company to purchase additional inventory as well as meet its sales goals.
Credit management is extremely important to any company that depends on obtaining or generating a cash flow from its customers. Credit management helps to ensure that a company does not encounter problems relating to insufficient cash or slow cash flow. As well, by helping to protect a business’s funding, a credit management plan can improve a company’s chances for success.You can download The Good Steward Financial System on your Iphone or Android device and start the credit score management process today.