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What is Credit Management?
Malcolm Tatum
Malcolm Tatum
Credit management is a term used to identify accounting functions usually conducted under the umbrella of Accounts Receivables. Essentially, this collection of processes involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on a customer invoice. When functioning efficiently, credit management serves as an excellent way for the business to remain financially stable.
The process of credit management begins with accurately assessing the credit-worthiness of the customer base. This is particularly important if the company chooses to extend some type of credit line or revolving credit to certain customers. Properly managing credit calls for setting specific criteria that a customer must meet before receiving this type of credit arrangement. As part of the evaluation process, credit management also calls for determining the total credit line that will be extended to a given customer.
Several factors are used as part of the credit management process to evaluate and qualify a customer for the receipt of some form of commercial credit. This includes gathering data on the potential customer’s current financial condition, including the current credit score. The current ratio between income and outstanding financial obligations will also be taken into consideration. Competent management seeks to not only protect the vendor from possible losses, but also protect the customer from creating more debt obligations that cannot be settled in a timely manner.
After establishing the credit limit for a customer, credit management focuses on providing the client with accurate and timely statements or invoices. The invoices must be delivered to the customer in a reasonable amount of time before the due date, thus providing the customer with a reasonable period to comply with the purchase terms. The period between delivery of the invoice and the due date should also allow enough time for the customer to review the invoice and contact the vendor if there are any questions or concerns about a line item on the invoice. This allows all parties concerned time to review the question and come to some type of resolution.
When the process of credit management functions efficiently, everyone involved benefits from the effort. The vendor has a reasonable amount of assurance that invoices issued to a client will be paid within terms, or that regular minimum payments will be received on credit account balances. Customers have the opportunity to build a strong rapport with the vendor and thus create a solid credit reference.
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
Learn more...
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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Discussion Comments
may i have comments on how to win credit purchases from suppliers, how should I find it on internet, we are starting a new company in UK to sell IT related products ( hardware and software), so it needs discounts and a credit facility.
merely experiencing no bad debt losses doesn't mean that a person is a good credit manager. A credit manager is one who manages the resources in such a way that there is maximum profit.
take the example of two managers with $100 of resources. One manager after thorough study utilises $50 and makes no bad debts and earns profit of $5 (say 10 percent) and other manages in such a way that he utilises $100 and makes profit of $9.8 (at 10 percent) and $2 is bad debt. There by earning a profit of $7.8 to his company.
So, merely incurring no bad debt cannot be considered a quality of good credit manager. --Vijendra
Comfyshoes- Many businesses especially those in the financial sector seek commercial credit management in order to minimize losses due to higher credit risk customers.
There is an organization that actually works with businesses and helps them make better credit decision by providing an informative network.
The National Association of Credit Management does just that. Its members get access to all sorts of information that helps them make better financial decisions with respect to extending credit to existing customers and new customers alike.
They teach businesses how to avoid and look out for customers that pose substantial credit risks to their company.
Oasis11- There are many consumer credit management agencies that have cropped up recently. These agencies provide credit management services to consumers who are behind in their credit card payments.
Often these credit management companies contact the credit companies directly and try to obtain a significant reduction in principle that often reduces the debt to a fraction of its previous balance.
If the credit card company accepts the terms then the remaining debt is charged off and the borrower is on a payment plan. Many of these debt credit management companies charge a percentage of the recovered funds as compensation or a set fee.
Because of the increased incidences in fraud in this industry, it is best to check with the Better Business Bureau before you seek help from any of these companies.
In addition, contact several companies and interview the debt counselor to make sure that the process is the same. Do not give up any money at the meeting until you have had an opportunity to assess the legitimacy of the company.
If you are already is major debt, the last thing you need is for someone to take advantage of you, so take these extra steps in order to protect yourself.
Anon63737- That is a really good question. Since the company did not have any bad debt losses, than it would be a sign of excellent credit management because the company did not allow outstanding payments to accumulate.
The credit manager either assessed the appropriate level of risk for each customer, or was able to successfully obtain payment before the accounts went into collections and could not longer be recovered.
A proactive credit manager makes all of the difference when a company is managing its credit risk management.
If a credit manager experienced no bad debt losses over the past year, would this be an indication of proper credit manager? Why or why not?
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