It is essential to protect your company from late payments and customer defaults for it can greatly impact your business. Credit management provides a firm grasp of a company’s finances to provide a balance between avoiding risk and seizing opportunities. Credit management process must be identified to have an effective credit management strategy.
Allianz Trade evaluated that customers’ default on their invoices is the cause of bankcruptcy among one in five small to medium enterprises. Credit management is an approach of the company to safeguard against late payments or defaults of its customers. It is a series of steps of providing credit to your customers, establishment of payment terms and conditions to allow the full payment in a promptly manner.
Credit management provides an advantage for it is a useful aid in planning and analyzing the financial performance of a company. The cash flow is secured by recognizing the number of customer late payments which can hugely affect your business. The opportunities of business investments of the company are identified in which can engage the potential lenders to provide a funding.
There must be a person or team that is held accountable regarding the management of credit. The payment terms of the customer must abide the specific rules and guidelines of the company. Days sales outstanding (DSO) is calculated by the average number of days to collect the payment from the customer. These elements can establish client creditworthiness which help the company create a proactive credit risk mitigation plan. Through this plan, you can monitor the payment progress of your client to ensure the compliance with your contract agreement.
Reference: Allianz Trade