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Credit management is a term used to identify accounting functions that are typically performed under the Accounts Receivable umbrella. Essentially, this collection of processes involves qualifying a customer for credit, monitoring the receipt and posting of outstanding bill payments, initiating collection procedures, and resolving disputes or inquiries related to charges on a customer bill. When it works efficiently, credit management is a great way for a business to stay financially stable.
The credit management process begins with an accurate assessment of the creditworthiness of the customer base. This is particularly important if the business chooses to extend some type of line of credit or revolving credit to certain customers. Proper credit management requires defining specific criteria that a client must meet before receiving this type of credit agreement. As part of the evaluation process, credit management also requires the determination of the total line of credit to be extended to a given customer.
Various factors are used as part of the credit management process to evaluate 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 score. The current relationship between income and outstanding financial obligations will also be taken into account. Competent management seeks not only to protect the provider from possible losses, but also to protect the client from creating further 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 time before the due date, providing the customer with a reasonable time to comply with the purchase conditions. The period between delivery of the invoice and the due date should also allow enough time for the customer to review the invoice and to contact the supplier if they have any questions or concerns about an item on the invoice. This allows all stakeholders time to review the issue and come to some kind of resolution.
When the credit management process works efficiently, everyone involved benefits from the effort. Supplier 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. Clients have the opportunity to build a strong relationship with the supplier and thus create a solid credit reference.