Understanding Credit Management

If you’re a small-to-medium business owner that wants to be as successful as possible, understanding credit management is a great way to generate genuine wins. Its use in your company will assist tremendously in ensuring that late-payments and non-payments by customers are avoided or prevented entirely. Here’s all that you need to know about credit management and the creation process involved with this function.

Importance of Credit Management

In today’s market it’s very difficult to succeed without a robust business credit management platform, especially when you’re just getting started. These systems allow you to make sure that the deals you make and the products you sell are paid for in a timely fashion. To underline the importance of credit management, you should be aware of the fact that more than 50 percent of all business bankruptcies are due in large part to faulty credit management.

Many businesses believe that simply chasing up late payments is something they can look after themselves. But not only does it take up your time, being reactive does not address the core issues that are leading to late payments.

The only way to avoid these issues impacting your business is by taking the necessary steps so these issues are detected as early as possible and any issues are resolved efficiently.  If you don’t search for a fix to the reason why the payment didn’t occur, it will continue to happen and you will lose out on both money and customers.

The procedures involved in credit management extend to identifying the credit rating of the customer ahead of time, monitoring customers for any potential credit risks, identifying late payments before they take place, preventing debt, detecting any complaints and responding to them in a timely fashion, and maintaining customer relations. If you take these facets of business credit management and work them into the fabric of your company, you’ll heighten your chances of success.

Benefits of Credit Management

Credit management allows your business to be more flexible in its dealings. One of the most direct aspects of your business you can affect is your Days Sales Outstanding (DSO). DSO is the average number of days a business takes to collect revenue after making a sale. Reduction of DSO allows a business to improve cash flow and make decision on the handling of funds and assets in a more fluid and predictable way. It has been shown that when credit management is implemented properly, DSO can be reduced by up to half.

Integrating credit management into your company will lead to improved cash flow and a higher amount of available liquidity, assisting greatly.

Finally, a less tangible benefit but certainly not inconsequential is the fact that your reputation and the image of your business will be positive. You will be seen as a reliable person to deal with and respected for your efficiency.

Creation of Procedure

The creation of a good credit management system can be done by limiting the tasks to two specific procedures. The first of these procedures involves the act of determining the strategy that you’re going to use. You’ll need to decide which customers you’re going to accept and which conditions you’ll set forth for these customers. Out of the customers who are accepted, you’ll also need to make a decision on which customers should be monitored. If the risks you identify for anyone who has been monitored come to fruition you’ll have to decide whether or not they will continue to be accepted as a customer and when the exit period will take place.

Once the strategy has been determined, it’s time to prepare all of the procedures you’ll use within the credit management function. There are some questions that will need to be asked about your business as it pertains to these procedures to make sure that they are as effective as possible. For instance, what is your invoicing system like? Are you going to make use of in-house management or will you outsource these tasks? When should you remind a customer by telephone that a payment is due? Should you also send a reminder through the mail? When should you get a debt collector agency involved? When are legal proceedings brought to the forefront? What will each of your employees do as it pertains to credit management? You must answer each of these questions and more so that you can be confident any credit management system you implement is operating smoothly.

Once all of these processes are laid out at once the benefits of third party credit management support start to become more obvious.

Understanding Required Systems For Your Business

There are a wide array of systems you can use when setting up your credit management procedures. Some of these systems will effectively protect any data you upload while others will make the process a smoother one. For instance, you’re going to want to have some form of acceptance system to utilize in order to accept certain customers and deny others. This process can be done manually or automatically depending on the criteria you wish to use when accepting customers.

You’ll also need a monitoring system to keep checks on certain customers who run a risk of not paying. These systems offer practically continuous analysis into both your customers and suppliers. A bookkeeping system is essential to record of all payables and receivables. This allows you to better identify cash flow and where any risk may be coming from. When a customer buys something from you, it’s important that you provide them with a proper invoice. There are many manual or automatic invoicing systems that can be integrated into your business. You should also consider a customer relationship management system that will store any complaints that are lodged.

As you can see, credit management systems can be complex and require experience and diligence to gain long term results that we have discovered can reshape a business cash flow and longevity entirely. If you want to talk more about credit management support, contact us today to talk to one of our credit management professionals.