Credit Management steps to follow That Will Immediately Improve Your Business

ABCAdda | Updated May 29, 2022

The credit management function is often understood as the internal collection of unpaid debts. If you ask a sales representative, they may also refer to preventing customer orders.

In essence, the picture of credit management is the process of receiving payments from customers. This is generally due to its role in reducing tied-up capital with customers. This guide provides a complete overview of credit management process policies.

What is credit management?

Credit management is providing credit to customers and educates them on the terms and conditions of repayment so that they can pay their bills on time.

Technology plays an important role in building a platform to streamline the lending and recovery process. However, the most important aspect of credit management is the credit decisioning process. 

This process lays guidelines for effectively choosing whom to lend credibility and to whom not, thus reducing the risk of default payments.

credit management process automation software

The importance of credit management

Some businesses do their best to start a new business but may be reluctant to take the final hurdle to ensure the transaction becomes a “paying deal.” More than half of all bankruptcies are due to poor credit decisioning processes, demonstrating its importance.

The importance of credit management and decisioning processes

Credit management for small businesses includes more than just payment reminders. Instead, it’s about thorough research and processes to identify possible reasons for non-payment, perhaps even when the solution or product has not yet been delivered and even when there are discrepancies in the accounts receivable. Effective credit management is a comprehensive process consisting of:

  • The initial determination of customer creditworthiness
  • Frequently scan and monitor customers for credit risk
  • maintain customer relationship
  • Detection of late payment in advance
  • Timely complaint detection
  • DSO Upgrade
  • Prevent bad debts

What are the benefits of credit management?

One of the main benefits of credit management is getting a clear picture of your company’s finances, allowing you to avoid unnecessary credit risks and take advantage of opportunities.

But that’s not all. The benefits of the credit management process also include:

  • Cash Flow Protection: Ensure that your cash flow always exceeds your cash outflow so you can pay your bills and your employees on time.
  • Reduce the number of late payments by detecting them early and preventing bad credit, reducing the chances of late payments negatively impacting your business.
  • Increase available business liquidity.
  • Perform bad debt collection faster and more completely.
  • Increase your company’s Exclusive Sales Day (DSO).
  • Identify opportunities and free your organisation’s working capital for critical business investments to support strategic growth.
  • Helps you plan and analyse performance and allows you to create a financial budget for the coming years.
  • Convince potential lenders who can fund your expansion plans.

Credit management best practices

No two companies are the same. Therefore, your business needs credit management for a small business plan tailored to the needs, industry and customers. However, experts agree that best practices for effective credit risk management include:

that best practices for effective credit risk management and automation software

  1. Streamlining contract collection and management.
  2. Identifying and analysing default risk on new customers.
  3. Creating a proactive credit decisioning process risk mitigation plan.

Credit management starts with contract management

In the case of a contract, be sure to include the terms of delivery and payment in writing and discuss all the contract terms. Here you can indicate whether certain conditions apply and not accept other conditions. As a starting point, you can find out from your professional association about common conditions in your industry.

When concluding a contract, we also recommend hiring a lawyer to review the conditions. It is also wise to stand before your customers and tell them in your contracts and accounts receivable that you have an insured loan. This clarifies that there are bigger consequences for late payment or non-payment.

Also, check that the person signing each receipt has the appropriate authority and has the company stamped on the receipt.

Credit management and debt collection

When debt collectors, ensure that all key data appears on your invoices so that payments are not delayed. Here is a brief description of the basics that should cover:

Your company name, address and phone number, along with contact name

Correct name and address of your customer’s company and correct contact person

  • Type and quantity of goods or services
  • Prices in respective currencies
  • Agreed payment term
  • your bank account number
  • Also, print your requirements on the back of the invoice

If payment has not been received, calls to customers may be made with accounting or sales just before or on the accounts receivable due date, depending on their relationship with the individual customer. This call confirms the product you have shipped and the receipt of the invoice.

This step makes the payment process easier and ensures good customer service so that everything is in order. It can also prevent late payments if your customer isn’t satisfied with the delivery—while there’s still time to fix the problem. You can even offer your customers a small discount if you pay within the deadline.

What are the usual steps in the credit management process?

Certain steps are required to establish and maintain effective managerial credit. You should develop a set of guidelines that clearly outline the credit terms for your business credit management customers, e.g. B., the amount of credit that can be extended, the term of payment, the interest rate, the default and how the policy is applied.

With this policy, your credit decisioning process or AR manager can determine a customer’s creditworthiness before granting credit. The creditworthiness process must be thorough and detailed and include all necessary information, including financial statements and credit history, to determine the customer’s ability to pay off any outstanding bad debts.

Once a loan is extended, it is important to have a consistent and effective process to monitor clients regularly to see if new risks arise. This includes invoicing, billing and tracking to ensure regular and reliable payments that maintain a healthy cash flow.

In particular, pay attention to the customer’s payment history and look for missed payment models. For example, when a customer misses a payment for the first time, this requires a different response than a history of missed or longer late payments. The answer varies depending on how serious the problem is.

Credit is based on trust, and a good credit management process involves good customer relations. Be proactive in identifying and responding appropriately to late payments and complaints in the first place. You have a policy of collecting payments that are past due. Be flexible but firm in dealing with this situation. Don’t set quotas that put the company at undue risk of debt collectors.

How is credit management for small businesses calculated?

Several factors can be considered when calculating the terms of a loan granted to a customer. They determine the level of risk the company is willing to take and the customer’s ability to pay back.

A customer’s credit rating tells you what your business risks are, and a lot of information about customers is provided by credit bureaus. Payment execution, transaction and purchase models are taken into account.

The business credit management must also consider the strength of the product or service being sold and the customer’s financial strength. The product’s market value – including price, sales volume, and demand – can indicate how much managerial credit extends if there is a reasonable expectation that payment obligations will be met.

Some customers will want to extend or adjust the credit they already have. This has risks and benefits. Providing loans creates goodwill with your customers and shows that you are a financially sound organisation that can afford to lend.

On the other hand, your business is at greater risk if customers are unreliable. Extended loans can also harm cash flow or payday (DSO), which measures the average number of days a business credit management takes to receive sales payments.

How is credit management traditionally done in the B2B world?

Before digital technology, B2B lending usually relied on spreadsheets. This is combined with a dunning process where customers are manually contacted to collect claims.

It involves fully sorting data from various systems to understand the debtor’s situation. With this information in hand (literally in some cases), managerial credit professionals typically work their way through their debtors, starting with the customer with the most outstanding debt.

 Development of strategic credit management procedures in case of late payments

Not all customers pay their bills within the agreed payment term. Therefore, make sure you have an effective late payment credit management policy. In case of late payment, contact the customer and remind them in writing that you must pay within a reasonable time, e.g. a week, hopefully.

If the payment has not been made, you can send a reminder and, if necessary, a reminder. This usually requires payment within two business days and provides a specific date by which must receive funds before litigation can begin. Given the costs associated with late payments, you should also consider adding fees to collect collection fees and interest.

If you make a payment term agreement, write down the terms of the agreement in writing and clearly state the following:

  • Total amount to be paid
  • payment deadline
  • The specific date on which payment should be received
  • Your bank account number and other bank details – if payment is sent/transferred electronically

With a credit management system, you also need to monitor customer progress. Are you following the rules? Are they perhaps on the verge of bankruptcy? Also, inform your credit agent.

Late payments by customers can affect their creditworthiness, underscoring the importance of credit control procedures. Having credit insured means your carrier will take care of tracking and collecting late payments, which saves you time and effort but can also help maintain your customer relationship by keeping you out of disputes.

Conclusion:

The modern business credit management and economic infrastructure are designed so that credit must be renewed and repaid for every business to function smoothly, making the importance and importance of credit management even more important.