What is credit management?
Credit management is a term used to identify the accounting functions that are typically performed under the Accounts Receivable umbrella. Essentially, this collection of processes involves qualifying a customer for credit, overseeing receipt and recording of payments on outstanding invoices, initiating collection procedures, and resolving disputes or inquiries about charges on a customer invoice. When it works efficiently, credit management serves as a great way for the business to remain financially stable.
The credit management process begins with an accurate assessment of the solvency of the customer base. This is particularly important if the company chooses to extend some type of line of credit or revolving credit to certain customers. Proper credit management requires the establishment of specific criteria that a customer must meet before receiving this type of credit agreement. As part of the appraisal process, credit management is also required to determine the total line of credit that will be extended to a given customer.
Several factors are used as part of the credit management process to assess and qualify a customer for some type of business credit. This includes collecting data about the prospect's current financial situation, including their current credit rating. The current relationship between income and outstanding financial obligations will also be taken into account. Competent credit management seeks not only to protect the seller from potential losses, but also to protect the customer from creating other debt obligations that cannot be settled in a timely manner.
After establishing the credit limit for a customer, credit management focuses on providing the customer with accurate and timely statements or bills. Invoices must be delivered to the customer within a reasonable period of time prior to the due date, providing the customer with reasonable time to comply with the terms of purchase. The period between invoice delivery and the due date should also allow sufficient time for the customer to review the invoice and contact the supplier if they have questions or concerns about a line item on the invoice. This allows all interested parties time to review the issue and reach some sort of resolution.
When the credit management process works efficiently, everyone involved benefits from the effort. Seller has reasonable assurance that invoices issued to a customer will be paid on time or that regular minimum payments will be received on credit account balances. Customers have the opportunity to establish a good relationship with the supplier and thus create a solid credit reference.