The credit policy of a business should be customer friendly and should provide adequate time to the customer for the payment for purchase or service. To successfully manage credit, a company needs to place importance on new customers and not only focus on the old customers. It will be important to reach out to new customers who will increase their reach as well as revenue, credit management enables the company to improve on their policies and regularize the cycle of receivables. The most important part about credit management is the collection and unpaid collection. A company needs to maintain a detailed record of the receivables which are due and this record should be updated fortnightly so that the concerned person is aware about the receivable amount. Once this is done, a method for collection should be established which should be legal and simple like making calls to the customer as a reminder for the payment due. If the payment is yet not made, then the management will require taking further steps which include discounting the bills of exchange or promissory notes which the customer may have provided.
Usually, most companies adhere to legal methods for collection which led to informing the customers about the date due and the payment to be made, they also have in house attorneys to help incase a customer fails to make the payment on time. For credit management, an analysis of credit worthiness or solvency of a business is very important. The credit policy should have a detailed procedure for collection, terms and conditions for giving credit and the legal steps to be taken when need be. Thus, when a company seeks a loan from a financial institution or a bank, they carry out a complete solvency analysis of the company which shows its credit worthiness and only if the results of the same are positive, the bank or financial institution will grant a loan. Any negative information about the company in the past shows that the bank will not be ready to grant a loan to the company. Hence, it is essential that the company makes timely repayment of its dues and ensures that it is not reported under bad debts, and then the financial institution or Bank will be interested in giving a credit to the company.
When a company provides credit to an individual in terms of trade credit, they also analyze the situation of the customer which reflects his credit worthiness or solvency. Only then the credit for the same is provided to the customer. Once credit is provided, it is necessary to regularly check on the individual so as to ensure that the amount will be received on time and there will not be any bad debts to be reported. The company sometimes needs to get security against assets as well as keep a track of the invoices. If nothing works, the company should call in a debt collector who handles the receivables for the same.
This policy should regularly be updated with the functioning of the company and should not remain static for a long period of time. For trade credit management, there are various steps which need to be followed. These steps begin with the concept of a business or sale or provision of services which is then followed by a quotation received from various vendors. After these initial steps, the payment conditions are set up where the role of trade credit comes in play. The policies and rules set for credit should be acceptable to the company as well as the customer.
Once the policies are agreed to, the business is started and the payment is to be collected. Once the period of credit is completed, the company opts for friendly collection which includes reminder to the customer for the payment, personally visiting the customer to collect the payment and also charging interest on the amount. If this does not work, the company has to opt for litigation to avoid the risk of bad debt. This involves banks, financial institutions as well as lawyers and this may take some time but the customer will have to make the payment to the company in the determined period of time.
If the company can handle credit effectively and plan its future transactions accordingly, the generation of cash will be sufficient and on time. This means, if well managed, a company will have its receivables collected in time when a payment is due. So the money that flows from the customers will directly be used to pay the supplier.
A good credit policy will reduce the bad debts to the minimum and ensure that the customer base increases. A customer will always prefer to purchase from a company which gives trade credit and for this to happen, the company will have to focus on new customers as well as on a customer friendly policy which ensures that the customer accepts the terms and conditions and is capable to repay the amount on time. It is essential for the company to internally update its receivables every few days so that they are aware of the amount that will flow into the business. It is also important to maintain records of the customers and their credit worthiness so that any chances of bad debt are reduced.
If a company is in need of additional cash, the credit policy and the terms of credit will require revision because credit will generate cash for the business. Effective use of credit management also provides additional credit to the company from financial institutions and ensures that the credit worthiness of the company is always positive and remains stable as well. Amongst all the policies that the company develops and implements, the credit policy has the capability to generate revenue as well as increase the customer base in addition to providing beneficial terms and conditions of repayment to the regular customers. Therefore, it can be concluded that trade credit management has the capability to give a competitive edge to a company in any industry.
References
UK: Setting Up A Good Credit Control System. (2012, Feb 21). Retrieved May 13, 2016, from Mondaq: http://www.mondaq.com/x/153848/Customer+Relationship+Management/How+To+Calculate+Marketing+ROI
Basic Outline for Developing a Credit Policy. (2015, Nov). Retrieved May 14, 2016, from ABC Amega Inc. : http://www.abc-amega.com/articles/credit-management/developing-a-credit-policy
Credit Management policy. (n.d.). Retrieved May 13, 2016, from Credit Tools: http://www.creditmanagement-tools.com/credit-management-policy-c5-r57.php
Niesche, C. (2013, May 27). How to manage your credit. Retrieved May 14, 2016, from The Sydney Morning Herald: http://www.smh.com.au/small-business/how-to-manage-your-credit-20130527-2n66e.html
