CHAPTER 4: CREDIT MANAGEMENT
4.1 Introduction
Credit management is the first line of defense in protecting an organization’s most valuable asset: its cash. Credit’s focus, of course, must be on protecting the cash, but credit management also has to be involved in the effort to obtain cash by enabling sales of the company’s goods or services to customers. The challenge lies in balancing protection with the company’s sales objectives. Denying credit terms to a customer could prevent the sale of products or services, leading the customer to turn to a competitor. Protecting the cash too carefully can result in fewer sales and less cash. Too many salespeople see the credit department as the roadblock to meeting their sales goals. The credit department must find the balance between protecting the cash and increasing sales, within the guidelines of the company’s AR strategy. An AR strategy defines how a company will use trade credit to maximize profits and cash flow. For some companies, this will be an AR strategy designed to maximize sales on credit and accept a significant level of bad debt and delinquency risks. For others, it will be a strategy designed to minimize bad debt and delinquency risk. Once the AR strategy is articulated in conjunction with the CFO and sales goals, a Credit Policy can be developed. With today’s methods of payment, there is often no need to say “no” to the potential new customer. Accepting payment by credit card is an easy way to assure payment without risk. Later in this chapter, we will analyze the pros and cons of this payment method; far too few companies are taking advantage of it. When selling on “open terms” rather than payment up front, each company must determine a risk factor that will allow it to gain adequate market share without having an uncollectible receivable amount that becomes unmanageable and jeopardizes the company’s financial health. This risk factor can be built into the price of the product as a cost of doing business.
4.2 Credit Management
The first major assignment of the credit manager (which here refers to the person who manages the credit line and receivable balance) is to understand the complete profile of the potential customer, to determine their creditworthiness and apply risk factors.
This information must be gathered and analyzed quickly to meet the date the customer needs the goods or services, or the sale could be lost.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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