What is credit management and what are its advantages | Alliance trade (2023)

Credit management refers to theProcess of lending to your customers, Set payment termsand conditions so that they can pay their bills on time and in full,recovery of payments, Andto ensure customers(and staff)comply with your company's credit policies.

We appreciate thatOne in five small and medium-sized business bankruptcies occur because customers default on their bills.And this is the consequence:late paymentsYour customers have an impact on your own creditworthiness. This is why credit and debt management is essential to running your business successfully.

So if you're wondering, “What is credit management?” imagine itYour company's action plan to protect against late payments or non-paymentfrom your customers.

Effective credit managementuses a continuous, proactive process to identify risks, assess their potential for loss and strategically hedge against the risks inherent in lending.

One of the main benefits of credit management is the ability to get a clear picture of your company's finances, allowing you to avoid unnecessary operationsCredit riskCredit riskand seize opportunities.

But that's not all.The benefits of credit managementalso includes:

• Cashflow-Schutz: making sure your cash inflows are always greater than your cash outflows so you can pay your bills and employees on time.
• Reducing the number of late paymentsby detecting them earlier and preventing bad debts, reducing the likelihood that a bad debt will affect your business.
• Increasingly availablebusiness liquidity.
• Faster and more complete debt collection.
• improvement of your businessDays of Pending Sales (DSO).
  
• recognize opportunities and free up your company's working capitalfor critical business investments that can support strategic growth.
• Help you Plan and analyze performance, which allows you to create financial plans for the coming years.
• Put potential lenders at easewho can fund your business expansion plans.

First, take a close look at the credit management services and practices currently employed by your organization:

• Who is responsible for credit management:A team? an individual? Or busy executives who may not have the time to make accurate credit decisions?
• What rules applytied to payment terms or your default payment process?

If you haven't already set up a credit and debt management process, here are some items to get you started:

• Calculate your averageDays Sales Outstanding oder DSO(the average number of days it takes you to collect payments from customers) and compare them to those in your industry.
• Verify that you pay suppliers on average before receiving payments. If so, you may need to do thisCustomize your billing cycle and payment terms.
• Ensure a healthy diversification of your customer portfolioso you don't rely on a big customer.

The whole company should become familiar with itCredit risk management best practices, which will optimize contract management and debt collection, identify and analyze the risk of non-payment for new customers and create aproactive credit risk mitigationto plan. You should define and hold accountable for the credit account management actions you require from other departments.

Finally, your credit management process should strive for a healthy balance of risk avoidance and opportunity seizing. Being overly cautious can cause you to miss some sales opportunities, while being overly careless can cause you to miss the signs of a risky customer.

Being proactive plays an important role in managing credit – especially understanding your customers' financial condition.

New customers are a welcome addition to any business, but make sure they don't become a liability:identify and analyze their payment default riskby creating a proactive credit risk mitigation plan. This is an important step in credit and debt management.

Existing customers should also undergo oneregular review procedures. Just because you have a good relationship with a customer doesn't mean they aren't insolvent.

Chambers of commerce and credit bureaus, bank and trade references, etc. can disclose a customer's most recent financial activity and cash flow status.

So, look at the client's specific industry and market, and note how it compares to the economic performance of closely related industries.

Managing credit becomes more complex when doing business with foreign customers becauseIt can be difficult to interpret and understand information used by foreign countries to measure creditworthiness.

When evaluating an international clientcontaincountry-specific credit risks,such as exchange rate fluctuations, economic or political instability, the possibility of trade sanctions or embargoes, etc.

Overall, audited financial statements are the best way to understand a company's financial condition, although some individual clients may not be willing to share them with you. A tool for checking the creditworthiness of customers such asAllianz Trade TradeScorecan help how canCommercial Credit Insurance. They give you indirect access to financial information and help you with credit and debt management.

When signing a contract with a client, keep the following tips in mind:

• Make sure the contract includes your delivery and payment terms and explains all the terms of the agreement, e.g. B. What terms and conditions apply and are acceptable to you.
• Ask an attorney to review the termsupon conclusion of contract.
• Clarify those payment procedure, Policies and Specifics and specify who to send your invoices to and ask for a receipt.
• bill earlywhen work has been completed or services have been rendered. Make sure your invoice is addressed to the correct contact, company name and address so it can be processed promptly. Ask the recipient to confirm receipt of your invoice.

To maximize the chance that your bill will be paid on time, we recommend that it contains:

• Your company name, address, phone number, email address and contact name.
• The order reference.
• Type and quantity of goods or services.
• The price in the relevant currency.
• The agreed payment term.
• your payment details.
• Your conditions, printed on the back of the invoice.

With these simple credit and debt management tips, you should find that the likelihood of late or missed payments is reduced.

Unfortunately, despite all these measures, you cannot guarantee that your customers will pay their invoices within the agreed period. This is where your credit management policies and credit management services once again prove essential. Monitoring your customers' payment progress to make sure they're honoring your contractual agreement can help avoid unpleasant surprises.Screen each customer with a frequency consistent with perceived riskpresented by the respective customer.

In the event of a late payment, do not call your attorney immediately as this is importantmaintain good customer relationships. Start by calling the customer yourself and follow up with a polite but firm written reminderthat you expect payment within a reasonable time.

If an invoice remains unpaid after two or three months despite your reminder,Consider using a professional collection agency, like yourscommercial credit insurer or a collection agency.

And for more help, you can search for additional credit management services. Although the benefits of credit management are many, even a well-defined strategy cannot cover all risks.Commercial Credit Insurancefrom Allianz Trade can complement and help you with your customer credit management processprotect against bad debts. Talk to one of our local expertsto learn how accounts receivable insurance can help your business protect its assets and grow with confidence.