Credit management is not a well-known term for the people who hardly know about finance, but slowly it is gaining attention. Let me first tell you what is Credit Management, Credit management is the function of granting credit terms and ensuring that money is collected when it becomes due. Good credit management promotes dialogue between finance and sales teams to create a balancing act where risk is minimized and opportunities maximized. Businesses around the globe have reported that sales on credit have become a common practice. It is generally believed throughout that offering credit is a key to nurturing business relationships and developing new ones.
Companies that allow payment to be made 15-30 days after delivery of the goods can be more attractive to some customers than businesses who require payment immediately. However, the risk of non-payment becomes more prominent with the longer credit period is extended and the size of the sum involved could mean the difference between life and death for the business offering credit. Credit management seeks to mitigate risk while helping to make a business as appealing as possible to potential customers. Credit management is also known as credit control.
The credit management process mainly involves two activities, firstly it is about making sure that your customers pay you on time for the goods or services you sold to them. The second and equally important activity is to ensure that you pay your suppliers on time.
According to Graydon, business intelligence experts, over half of all bankruptcies can be attributed to poor credit management. Without a doubt, even profitable businesses can struggle if they do not properly manage their accounts receivable. Without the working capital to invest in the business and settle with their own creditors, a company can quickly spiral into debt. It’s not only the slow payers that can impact on the cash flow of your business. Fraudsters will take any opportunity to misuse the offer of credit.
A sale on credit is equivalent to granting a financial loan to your customer. It is a loan on which you don’t even earn interest and it is not secure as well, because you can never be certain that your customer will pay you. Effective credit control is key to sustaining a fast-growth and survival of a business, and with technology taking over a major role now, it is also being considered as the next big thing in fintech. Here we have listed some of the importance of credit management,
- Ensures optimal cash flow
A business can function well only when it has sufficient cash flow for its various activities. Managing credit is a significant factor in ensuring optimum cash flow. In your business when you manage credit effectively, both receivables and payables, you ensure that your business runs on its optimum cash flow. On the contrary, when you don’t monitor the money that you have to receive from your customers, your capital remains locked, which could have been utilized for more profitable purposes. Similarly, when you don’t monitor the money that you owe your suppliers, you become liable to pay interest and/or other penalties that your suppliers may charge you. This again hits your cash flow.
- Contributes to brand reputation
For a business, reputation is everything. The consistency and commitment with which you pay your suppliers can help you in building your reputation for credit payments strongly. This will imply that more suppliers would want to do business with you and would be willing to extend favorable credit terms to you. Your reputation for paying your suppliers also gives you a better standing to expect clear payment terms from your customers. Hence, a good credit management process is essential to build a good reputation in your industry.
- Protect your financial stability
A huge number of companies (in thousands) disappear because of one or more invoices were unpaid by their customers. The repercussions of money unpaid by your customers can be manifold and can exceed all your forecasts. Your financial performance and growth can get hindered if you don’t manage the money you ought to receive from your customers.
- Build long-term relations
Effective credit management enables you to weed out customers who run the risk of non-payment. This ensures that you select your customers cautiously, which in turn, gives a higher probability of creating long-standing relationships. Likewise, regular payments to your suppliers on time help build credibility with your suppliers. These long-standing relationships are important for your business to grow.
- Avoid additional cost on credit
At the point when you don’t manage credit optimally, you become prey to penalties and interest that your suppliers may impose. On the other hand, when you don’t receive due amounts from your customers, you would be required to spend additional time and money to coerce your customers to pay. All these become additional expenses for your business. Managing credit well makes sure that you can avoid such additional costs to a large extent.
Credit management is being looked upon as the next big thing in fintech and it is also very crucial for any business. The sooner you put in processes for credit management, the better it will be for your business. You can also say that managing business credit well is short of an art.
Aashish Yadav, Content-Editor, FintecBuzz
Aashish is currently a Content writer at FintecBuzz. He is an enthusiastic and avid writer. His key region of interests include covering different aspects of technology and mixing them up with layman ideologies to pan out an interesting take. His main area of interests range from medical journals to marketing arena.