The Golden Rules of Credit Management

juni 17th, 2013 · by John · Weblog EN

Extending credit to customers is like offering clients an interest free loan. There is no immediate expense, but granting credit entails additional costs. Allowing clients to defer payments increases the risk of bad debts and drains your cash flow. The only reason therefore to incur these costs, is to get a profitable sale that would otherwise be lost.

It is the responsibility of Credit Management to make a sale possible and, at the same time manage the costs of extending credit: bad debt and interest. Credit management should therefore be involved in both the credit approval (before the product or service is delivered) and I past due management (after the product or service has been delivered).

If you are a credit manager, you therefore have a tough job to do. Sticking to the Golden Rules below will make your life somewhat easier, but still very challenging.

  1. Determine the creditworthiness of each customer before credit is extended. Assess the credit risk, and based on that set credit terms (days), credit limit (amount) and, if needed securities.
  2. Continuously and at least annually, review the credit rating of existing clients. Always evaluate creditworthiness when clients exceed their limit or when you seek and become aware of other relevant information.
  3. Apply a strict review, authorization and communication process for granting credit limits and setting credit terms. A credit application should contain full business and personal contact details, trading name, credit guarantors, referees, identification number and years in business. Obtain a credit report to determine whether the client is creditworthy.
  4. Send out customer invoices immediately, and allocate payments to outstanding invoices on the day of receipt of the bank statement or remittance.
  5. Have a management review of aging reports at least twice a month and take appropriate actions to resolve issues.  Set targets for improving DSO per client and follow up on plans.
  6. Put customers on credit hold when they exceed their credit limit or when they have past due amounts. Implement a system lock to prevent handling shipments of customers on credit hold.
  7. Follow up collection through reminders and dunning letters. Treat delinquent payment as debt, and decide on what in-house collection measures to take, and when to refer to an external professional.
  8. We are all in Credit Management! Work with sales, operations and other departments to stay on top of what’s happening with a customer and to resolve issues quickly.

These Golden Rules are only a high level overview of what you as a credit manager should do and, no less important what your organization should do to finalize the sale. And the sale is finalized no earlier than the moment the money is on your bank account. In future blogs I will go into more details on the various aspects of credit management.

John Greijmans

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