The web definition for credit management states that it involves the policies and practices retailers follow in receiving payments from their customers. Credit selling is a major strategy for achieving increased sales and ensuring customer loyalty by the provision of goods or services with delayed payment. Retailers sell goods or services in cash or on credit. The costs associated with delayed payment are those of seeking alternative sources of funds due to cash receipt delays or default in payment. Benefiting as credit sales may be mismanagement can lead to huge losses and possible liquidation of the business. To avoid this loo, business owners draw up credit policies that present a trade-off between the benefits and the setbacks of credit sales.
The objective of credit management can best be described as minimizing credit loss while maximizing profits. When making a sale on credit, the assumption that full payment will be tendered on the due date without pre-emptive measures placed to ensure this is nothing short of a leeway to granting of bad debts. It is important therefore, to set clear guidelines on credit sales that will help minimize the exposure of the business to bad debts whilst improving its cash flow. Such pre-emptive measures are;
1.Draw up a terms of sale
This requires you define how goods or services are sold, whether sale is to be made in cash/credit, the credit period, the discount on it and the period. These terms must also consider factors such as industry standards, cost of funds, nature of product and competition.
2.Determine the form of contract
A form of contract documents the nature of your transaction. You should specify the type of credit instrument used. One form is referred to as the open account whereby the sale is recorded and evidenced with a receipt. Another form of evidencing credit sales is the letters of credit.
3.Assess your customer’s credit worthiness
Proper credit management requires you to analysis your client’s credit worthiness. The following practices are guidelines;
a.Check for availability of client’s collateral.
b.Reviewing financial statements to ascertain capacity to repay out of operating cash flows.
c.Analyze credibility of character in other to establish whether there is good intention of making payment when due.
d.Check health of financial reserves.
e.Conditions in which client’s business operates (sector, economic or political trends).
As to how to acquire these information look up client’s financial Statements, Industry ratings and reports from you their banks, suppliers, customers or even business papers.
4.Setting credit limits
Credit limits ensure you don’t run your business aground by stating maximum amount of credit that can be granted ensure that cash flow and cost of funds of your business are optimized.
5.Establish a credit collection policy
The essence of a collection policy is to mandate that instructions or standards are followed on how credit proceeds are collected. It enables you monitor outstanding payments until all payments are in.
Author Resource:
Roy CBC is author of this article on Debt Collection .
Find more information about Debt Recovery here.
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