What is a credit management system?

What is a credit management system?

The process of monitoring and collecting all kinds of payments from customers is called credit management, With a good credit management system in place, the amount of capital that?s under the debtors is significantly minimized.

For an efficient cash flow through an organization, having a good credit management system is very important.?

Often when a plan looks profitable to an organization theoretically, you might realize that the practical execution might be hindered at times due to lack of funds.

For the sake of avoiding such scenarios, one of the best alternatives is to cut down the possibilities of extra bad debts. It is possible when you have a good credit management system in place.

For running a profitable business in any kind of enterprise, the entrepreneur has to prepare or design all new kinds of policies for credit management.

Credit Management Principles

Credit management is very important, especially in the banking sector. Banks are one of the major sources of lending capital, which means they have to follow certain principles for the same.

Liquidity

Liquidity is very important when it comes to lending money. Banks have the potential of giving money for a short duration of time. The reason is that the money they are lending is public money which could be withdrawn by the depositor at any time.

So, to avoid chaos, banks often lend loans after the seeker is able to produce enough security of assets that could be easily marketable or transformable to cash. That too in a short period of time.

Banks are in the possession of taking over produced assets in case the borrower can?t repay the loan amount after some time as decided.

Stability

For a bank to function smoothly, be stable overall, and work efficiently, it needs to maintain stability overall.?

A bank should also be able to invest in such stocks that have a higher degree of stability in their costs. These can?t incur losses at the cost of its securities. Thus, investing funds in the shares of all kinds of branded companies is always one of the best options where the probability of a decline in the rates are less.

Different kinds of debentures carry fixed costs of interest. The same goes for government contracts. The cost is different when a variation occurs in the market ROI. However, the bank is always bound to liquidate a part to meet all the needs of cash whenever they are struck by a financial crisis.

Profitability

Profitability is one of the prime concerns of investments, we all agree on that. Banks should invest only when it known it could earn sufficient profits from it. Thus, if it is to invest, it should understand the risks and know that it can?t gamble with investments.?

It also involves the securities of all kinds of govt branches that carry the exception of their interest from taxes. Banks should also prefer investing in such securities over investing in the shares of new companies that could also carry the tax exception.?

Lending money to someone always involves risks. It could even be converted into bad debts. If a bank lends the money as loans, it might take time to come around.

Simply put, banks can rent money from depositors and give it to the borrowers. For a primary source fo funds for a bank, money deposited by customers is repayable when required by the depositors. As such, extra caution needs to be maintained.?

Safety

Finally, one of the most important functions of lending is the safety of the lent funds.

By safety, we mean that the borrower needs to be in a position that could allow them to repay the loan along with the interest at regular intervals without fail. The whole repayment relies on the nature of security and the ability of the borrower to pay back.

Quite unlike a lot of investments, the bank investments are pretty risk-prone. The intensity of any kind of risk is usually different as per the type of security. The securities of the central govt are pretty safe as compared to state govt and local bodies.

The variation arises due to the fact that all resources that are acquired by central government are high and much valued as compared to the ones help by state and local govt.