Credit Management
The modern day business environment has made trade credit to be an essential component for many businesses. In the UK for example, close to 90% of the business transactions between firms are on credit (Boden & Paul, 2014, p. 260). The implication is that companies have the dilemma of gaining the advantages that come with trade credit and the risks that go with this phenomenon. Credit management practices for the modern day business, therefore, need to be strategic to ensure that a company continues to enjoy success in the market.
The ability of a company to successfully gain a competitive advantage when dealing with trade credit is dependent on the nature of credit management mechanisms that a company employs. There are two essential components in credit management; credit administration and credit controls (Giannetti, Burkart, & Ellingsen, 2011, p. 1290). Credit administration calls for a company to organize the credit processes properly to ensure that they run seamlessly. Credit controls, on the other hand, necessitate the management of risks that come with trade credit. The ability of a company to excel in the two functions determines whether a company succeeds in building a competitive advantage.
A critical aspect of understanding the role of credit management as it relates to proper credit control function is the complexity of the business organization (Busuttil, 2012). Most businesses that engage in trade credit are characterized by huge volumes of activity which make the management of credit information difficult. Besides, business organizations, due to their size, make it difficult for the company to engage in successful credit management. The implication is that big business have to come up with well-structured credit management personnel, who are fully devoted to making a company’s control function efficient.
The modern day business environment is also characterized by significant pressure regarding competition, volatility of currency rates and increase the level of debt. The implication is that firms that fail to monitor its credit risks closely face the risk of failing to survive (Busuttil, 2012). A review of the literature on trade credit, especially in the financial institutions, reveals that many companies have experienced substantial losses due to non-performance in credit management (Cunat & Garcia-Appendini, 2012, p. 528). This underlines the significant role of effective credit management practices in ensuring that a company remains competitive in the modern day market.
In credit management, there are two essential aspects that businesses are interested in. First is the issue of customer relationships. Companies usually make the effort to foster healthy customer relationships through the use of trade credit (Boden & Paul, 2014, p. 262). In building these relationships, companies get to discover essential information about their clients, information which leads to profitable business outcomes for the firms. In fostering customer relationships, credit periods come up as a key component. Long term credit alliances with their clients breeds trust of those particular businesses, meaning that more firms are encouraged to deal with trade credit.
The other essential benefit gained from successful credit management is the considerable reduction in the costs of finance (Boden & Paul, 2014, p. 262). This advantage is realized through the knowledge that a company gains about the behavior of the customers. By dealing with trade credit, firms get to know the payment habits of different clients and their particular need. In the long term, therefore, firms positively gain from the arrangements with the customers.
The first aspect in making credit management effective is the elimination of all barriers that may hinder customers from making timely payments. In some cases, companies are inefficient in processes such as order processing, product distribution, and quality management. When these processes are compromised, payment is also considerably affected. Businesses, therefore, need to optimize their business processes to ensure that they do not affect payment in any way. Businesses should be efficient in their dealings with the customers such that the clients can make no excuses based on poor performance. To this end, companies need to structure their processes such that it is easy for clients to conduct business with them (Schmidt, 1997). The next aspect that can help in the optimization of credit management is providing access to sufficient and reliable information. Departments that deal with credit management usually require the use of a variety of company records ranging from customer credit reports to various accounts receivable details (Giannetti, Burkart, & Ellingsen, 2011, p. 1271). Efficient credit management calls for the consolidation of all this information, to ensure that the work of credit management departments is made easy.
An essential aspect of ensuring that a company deals with late payments is the use of adequate credit collection procedures. To this end, credit management departments need to come up with systematic credit collection systems. The emphasis of these systems should be on follow-up, where defaulting clients are convinced to pay in time. Before lending, companies need to establish well-defined customer expectation, which will help in guiding the credit relationship (Giannetti, Burkart, & Ellingsen, 2011, p. 1272).
Another consideration that can assist in making the credit management processes more efficient is the establishment of reasonable risk assessment criteria. Information informs credit processes. For credit management to be effective, however, companies needs to understand fully the specific information they require. Gathering the right kind of information means that a company can carry out an accurate credit analysis (Cunat & Garcia-Appendini, 2012, p. 531). This will ensure that the corporation will only deal with credit worthy customers. Besides, companies also need to invest in efficient procedures for approving credit. There is a strong connection between adequate assessment of risk and timely credit repayment (Schmidt, 1997). Effective credit approval means that first only deal with credit worthy customers.
In conclusion, dealing with trade credit has become a necessity in the modern day business. Credit management has emerged as an important tool that is used to maintain a firm’s competitive advantage. Unlike in the past where the credit function had two major roles; keeping up with financial figures and reducing credit risk, the modern day function plays a variety of roles (Busuttil, 2012). Some of these essential services include the fostering of healthy relationships with customers, looking out for opportunities where a company can make a profit and dealing with financial-based internal inefficiencies that may have adverse effects for an enterprise (Busuttil, 2012).In a bid to gain a competitive edge, firms are being forced to enter into credit agreements with their clients. Such arrangements have the potential of bearing both positive and negative outcomes for businesses. Credit management, therefore, comes up as an essential aspect of ensuring that sustainable outcomes are realized from credit processes.
Bibliography
Boden, R., & Paul, S., 2014. Creditable behaviour? The intra-Firm management of trade credit. Qualitative Research in Accounting & Management 11.3, pp. 260-275.
Busuttil, J., 2012. The Credit Function – its role for 2012 and beyond! . www.jbconsult.biz .
Cunat, V., & Garcia-Appendini, E., 2012. "Trade credit and its role in entrepreneurial finance." . Oxford Handbook of Entrepreneurial Finance, pp. 526-557.
Giannetti, M., Burkart, M., & Ellingsen, T., 2011. "What you sell is what you lend? Explaining trade credit contracts.". Review of Financial Studies 24.4, pp. 1261-1298.
Schmidt, D. (1997). 8 Critical Success Factors For Credit and Collections. Retrieved May 16, 2016, from businessfinancemag.com: http://businessfinancemag.com/tax-amp-accounting/8-critical-success-factors-credit-and-collections
