What is Credit Management and How do you do it well?

What is Credit Management?

Credit Management is the strategy a business uses to safeguard its investment in its customers. When an organisation lends goods, services or money to others, the credit management function makes sure their transaction with that customer is safe and profitable. This includes assessing a potential credit user’s reliability or ‘creditworthiness’, managing the client account and business relationship, and handling any queries and issues. The ultimate aim is to secure repayment of the credit provision on time and to secure future, ongoing business.

Why is Credit Management important for businesses?

Credit Management is essential for businesses for many reasons:

• It regulates the cash flow cycle by creating a steady and reliable expected flow of income.
• It helps avoid financial losses by assessing the risks of extending credit to customers.
• It provides information that helps business leaders develop strategies and resources.
• It supports top-line sales growth by allowing customers to purchase on credit.
• It encourages customer loyalty by offering customers an effective credit service.

What does good Credit Management look like?

You must ensure that you follow the Best Practices in Credit Management. Some of these will include:

The creditworthiness of potential credit customers should be thoroughly evaluated. This involves analysis of financial information, credit history, payment patterns and industry-specific factors. Credit should be offered to customers based on their affordability and creditworthiness and should fall in line with the business’s risk-reward appetite.

An effective Credit Policy should establish a set of clear and defined terms and outline any circumstances that allow these to be adapted. A good Credit Policy can be used to communicate credit limits, payment terms, interest rates and penalties for late payments.

A robust set of terms and conditions that support the sales contract will protect the business and its customers. It should show terms of business, payment terms, and methods of payment. It should outline any contractual protection, such as the right to charge late payment interest or retain title to any goods sold on credit. The customer will fully understand what is expected if this is done well.

A Credit Management process that monitors its customers is more likely to spot the early warning signs of a customer that is incapable of paying. Monitoring includes trend analysis of payment patterns and any changes in a customer’s financial circumstances.

Implementation of a proactive collections strategy ensures any potential payment problems are uncovered and addressed before the due date for payment. Clear collection pathways should be followed if payment is not made on time. This can be written reminders, collection calls and escalation processes. Clear and unambiguous communication is essential to ensure the customer understands what will happen if they do not act and what they need to do to make things right, and a good Credit Manager, will know when to "Get tough" at the necessary time.

In the changing world of Credit and Collections, Artificial Intelligence and automation are increasingly present in our lives and the race towards digitsation is underway. Good Credit Management will utilise these tools to increase the efficiency of processes such as tracking invoices and payments and implementing automatic reminders and collection workflows.

A credit function that utilises AI processes should never forget the power of the human touch. It should ensure a human connection with the customer and use this to safeguard their relationship.

Credit Management is essential for businesses

Credit Management is vital for the financial stability and success of a business. It allows businesses to secure sales, maintain a steady cash flow from those sales, and minimise the impact of financial losses from late payments and bad debts. If you work within the industry, it is important to have the right qualifications from the Chartered Institute of Credit Management to supply the knowledge and skills to maximise effectiveness

A long-lasting Career in Credit Management

A credit career is one that its professionals normally claim to have "fallen into". You will hear this phrase from Chris Hardman's podcast about his career and many others. However, to quote the Ex-Chief Executive, Philip King FCICM, from his very own blog: "What a great and varied career I’ve had... and what a brilliant profession credit management is."

If you're investigating your career options, Credit Management can make your list. As an essential function to organisations in the protection of cash flow and risk, the career is a fantastic one for school leavers or those pre-existing in the finance department.