Why Your Business Needs Strong Credit Management

Credit management is considered as an important activity for every business. To put it simply, credit management process involves two activities. Firstly, it is about ensuring that your customers pay you on time for the goods or services you sold to them. The second and equally important activity in credit management process is to ensure that you pay your suppliers on time. Extending credit to your customers brings with it the risk of them not paying you. However, most B2B businesses are necessitated to extend credit. So what is the Importance Of Credit Management In Your Business?

Ensures optimum cash flow

A business can function only when it has enough cash flow for its various activities. Managing credit is a key factor in ensuring optimum cash flow. When you manage credit both receivables and payables in your business effectively, you ensure that your business runs on its optimum cash flow. On the contrary, when you don’t keep track of the money that you have to receive from your customers, your capital remains locked, which could have been used for more profitable purposes. Similarly, when you don’t keep track of the money that you owe your suppliers, you become liable to pay interest and/or other penalties that your suppliers may charge you. This again hits your cash flow.

Contributes to a good reputation in the industry

Reputation is everything for your business. The consistency and commitment with which you pay your suppliers can build your reputation for credit payments strongly. This will mean that more suppliers would want to do business with you and would be willing to extend favourable credit terms to you. Your reputation for paying your suppliers also gives you a better standing to expect clear payment terms from your customers. Hence, good credit management process and the best credit risk management software is essential to build your reputation in your industry.

Safeguarding your business against fraud

If you’ve dealt with business credit defaulters in the past, you may know it’s a tiring and tedious process. If you avoid going into the details, you may not find out the risks and challenges attached. Maybe your vendor has no intention to pay you for the next three months. However, if you follow standard credit management practices, you would know where to draw the line. It will save your business from suspected fraud.

Gaining business creditworthiness

When you learn credit management techniques, you also learn to keep the cash flowing and utilize funds. It all leads you to gain business creditworthiness. When you pay your dues and receive payments timely, the market assesses your ability to take credit as you will be able to pay it off when it’s time. It gets reflected in your business credit score too.

Maintaining a good rapport with your suppliers

Having an optimum cash flow yields benefits. If you work with your suppliers and vendors on a credit basis and ensure that the payment cycle remains undisturbed, your business relations grow. You’re likely to enjoy a good working relationship with your business associates. So, you can enjoy benefits like receiving material on time, fewer delays in supplying goods and materials, etc.

Ensuring smooth cash flow

It is in addition to the previous point. Your cash flow cycle determines if you are enjoying your business or merely trying to sustain it. When you follow standard credit management practices, it shows your seriousness in understanding how the system works. When you know the amount coming in and going out regularly, you can improve your cash flow if required.

Credit management is important because it reinforces a company’s liquidity. If done correctly it will improve cash flow and lower the rate of late payments. It’s the difference between a high or low DSO, amount of bad debt a financial portfolio presents and even negative or positive customer relations. We’ve pulled together a few questions to help determine quality of your current credit management.

  • How are you evaluating customer credit? When new customers are applying for credit, you’ll need a system, manual or automated, to determine creditworthiness. Then a process in place to monitor over time.
  • What is your invoicing process like? This can also be manual or automated, paper or electronic. It’s important to keep in mind, nearly 1/3 of B2B organizations report more than 50% of their customers have unique invoice requirements.
  • Who handles the collections? It’s inevitable that customers will fall behind on payments. You’ll need staff to track down payments and apply them correctly. It takes on average more than 18 hours per week of a full-time employee to collect payments and more than four days to onboard new customers.
  • What is the role of your employees in this issue? A chronic reliance on automated A/R processes takes a human toll. A/R teams struggle to keep up with the high volume of customer requests and disputes as well as the increasing amount of invoice and billing errors that require attention.

The pitfalls of poor credit management

According to business intelligence experts Graydon, over half of all bankruptcies can be attributed to poor credit management.  Indeed, even profitable companies can struggle if they do not properly manage accounts receivable. Without the working capital to invest in the business and settle with their own creditors, a business can quickly spiral into debt. It’s not just the slow payers that can impact on the cash flow of your business. Fraudsters will take any opportunity to exploit the offer of credit.

To avoid slow-payers, businesses teetering on the edge of insolvency and crooks looking to commit fraud you will need to practise due diligence. This means thoroughly checking every potential new client before signing a deal with them, and then maintaining contact with a robust monitoring system.

When you take out credit insurance with Atradius you will benefit from the due diligence and finance background checks that we do on your customers. We recommend you combine this intelligence with your own research before commencing trading relationships.

Choosing a Credit Management Provider

Once you’ve decided to seek a third party to help manage your credit program, look for a provider with a comprehensive service and platform.

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