CHAPTER 4: CREDIT MANAGEMENT
There are differences in the process based on whether the account is a consumer (B2C) or a business (B2B). Basically, credit management should: 1. Know who you are dealing with, both the company and principals involved if a business, or the individual consumer. 2. Understand and identify the correct legal status with which you are dealing. For example: a. If a consumer: Are they single or married, which can affect ownership? b. If a business: Is it a sole proprietorship, partnership, LLC, or a large commercial client that is incorporated? Or is it a subsidiary of a large corporation? How does that affect its credit profile? 3. Understand the industry the client is in—this is important for both operational, credit, and reputation risk assessments. For example, the automobile industry usually pays via Evaluated Receipt Settlement (ERS) and this has a major impact on cash application because the ERS process does not reference an invoice number. 4. Understand the credit profile. Companies often focused on creditworthiness based on simple facts provided by the customer itself. However, today there is a greater need to obtain a complete view of the business or consumer that includes objective, fact-based information, validated by third parties. Of course, the AR manager must balance the degree of effort in each of the above steps against the risk factors and the type of credit or business arrangement being entered into. Moreover, doing so is not a one-time effort but rather an ongoing component of due diligence with the ultimate goal of maintaining an effective and profitable relationship with clients. With regard to risk, the evaluation process is not over once an account has been opened. Customer accounts must be monitored on a regular basis depending on how much cash could be at risk. This adds a critical task to credit management. Many companies do not perform this task of re-evaluating active customers. They leave it to be handled in the collections area. However, the process in collections is reactive, and if customer reevaluation is moved forward to the credit management area instead, it can reduce the amount of cash lost as a result of unpaid invoices. When companies adopt this proactive process, credit management can reevaluate active customers to determine if credit lines should be raised, lowered, changed to credit card or cash in advance (CIA), or closed. The slow-pay accounts may need to have their credit lines lowered or removed, and changed to CIA or credit card until payment trends improve, thereby eliminating the potential for an unmanageable receivables balance. Customers who are paying on time and have a strong history may need to have their credit lines raised to entice more sales—which can also encourage the sales team to view credit management as a valued partner. This requires new financial records, credit scores, and peer group payment history. Companies also need to be careful about how they are measuring credit management. If all customers are paying on time, which is reflected in a perfect DSO (Days Sales Outstanding), then the company may be missing sales, or—more profoundly stated—missing cash. If all receivables are paid on time, it could be a signal that credit limits should be raised and that good potential customers are being turned away instead of being granted some line of credit.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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