Credit Management:An Overview,its Importance and Characteristic of a Company having a well run credit management department

Importance of Credit Management and the characteristics of a well run Credit management department

Effective credit management and decisions are important elements in managing a successful business as it helps to:

1. reduce credit risk exposure,
2. improve cash management through timely collection,
3. balance and avoid possible losses on potential sales versus achieving sales objectives.
4. In time of recession,survival vide good credit management or for short term purposes,to tide over cash crunches where the company is in an “overtrading” situation (share capital injected is very low compared to its sales)

Sad to say,top management may profess to be well aware of problems resulting from the existence of trade credit but frequently they underestimate the task of safeguarding against the inherent risk. Therefore,it is not unusual for a company to have some 25% of all assets and 40% of current assets in trade debtors.

Frequently,the questions asked is what constituted a company with a well run credit management department? Some good characteristics are:

1. The company should have a clear cut credit policy and procedures fully endorsed by its top management and clearly make known to all sales staff and credit management personnel,
2. Top management in its operating profit performance’s review must clearly support and review and reinforce consistently all key performance indicators like % of ageing,targeted days sales outstanding,return on invested capital that affects the capital investment in the trade debtors,
3. Top management imposes key performance indicators on their credit management personnel so that they will appreciate and understand what role they are supposed to play. In turn the key performance indicator of the credit management department are cascaded upwards to the company’s goals,
4. Daily,weekly,monthly or periodic reporting showing actual collections versus target and in these reports,we can see deviation against budgeted figures,includes specific and aggressive ongoing action plans pertaining to overdues like litigation progress report and others,
5. Specific defined weekly meeting is conducted. This should be in the presence of the head of the business unit and his/her salesperson team,credit controller/manager and general manager. In these meeting. Like all serious and effective meeting,every one must come punctual,well prepared and minor disturbances like mobile phone should be on silent/vibration mode.
6. Recruitment of credit department personnel with good skill sets and attributes,
7. Mindset of Operating managers towards impact of good credit management in the company. All the operating managers understand the serious implication of losses due to bad debt.. Say,the company presently has a 5% net profit on sales,a loss of $5,000 in debt debt will nullifies the net profit on $100,000 sales,
8. Good credit management must balance with the Order to Cash process in the Company. The Order to Cash process is scrutinised,properly planned,simplify and automated wherever possible,consistently and systematically executed in the daily operation of the company,
9. The company should have an overall incentive sales system basing on cash collection from the sales rather than sales alone. In the incentive system,there should be established claw-back procedure of salespersons commissions if cash has not been timely collected within certain time frame. With this been embedded in the system,this will definitely send the correct message to all salesperson to “respect” credit management.
10. Another hard to find feature is the readiness to put up the necessary action or litigation process once certain breach have been made by the customers. For CFO who are in a marketing driven organisation where sales is paramount,it’s extremely difficult to talk about putting up certain hard stances when clear signs/indicators are shown on customers in the verge of defaulting. Normally,we see Sales or the Marketing head will say things like “ ok we will see first or we don’t understand our customers and many other reasons to support the customers”. All these,make the Credit department the bad guy,people who don’t understand sales or customer satisfaction until things become too late to remedy.

In the forthcoming article,we shall discuss further the importance of the credit policy and procedure which will encompass all facet of good credit management in a company.

• What Are The Roles/Function Of Credit Management Department
• ALL TOPICS COVERED UNDER THE HEADING-CREDIT MANAGEMENT/CREDIT CONTROL
• Why Do We Need To Keep A Proper Sales Ledger To Help In Credit Management
• Salient Features of a Good Credit Policy and Procedures Manual
• Why Should Credit Limit Be Imposed.Is it necessary for the company to inform the customer about its credit limit and credit terms?
• Credit Management:What is the KPA and KPI of a Credit Manager?
• Performance Management/Measurements/KPI used in Credit Management/Credit Control