Meaning, Objectives and Importance of Credit Management

What is Credit Management? Why do we need to manage credit properly in our business? What will happen if credit is not managed properly? Why does some business face the problem of cash crunch and what makes them to close the businesses? So in order to understand all this questions let us try to understand credit management and let us go through the article to get answers.

Credit Management

          Credit Management refers to the process of providing credit, recovering credit on the due date and also formulating a credit policy for a company or organization. Credit Management is one of the techniques in order to manage the bad debts of the company in an efficient manner. Usually the credit period consist of the 15 days to 60 days and in some case even 90 days.  Firm’s credit policy is decided based on the investment a firm does in account receivable.

Objectives of Credit Management

The objectives of the Credit Management is to

§  Maintaining strong and effective cash collections.

§  Scrutinizing accounts receivables portfolio and warning signs.

§  Defining the credit levels for various customers.

§  Defining the credit policy.

§  Preventing non-payment and delayed payments.

§  Controlling Finances and limiting of debts.

Why is Credit Management Important?

          We have heard that many business start and get closed in a very short span of their operations saying that they have gone bankrupt or having high cash crunches. Have you ever what why did it happened? That it’s because of improper management of credit or poor credit policy. Thus it is important for every business to maintain optimal credit policy to overcome problem related to cash or cash management. Credit Management helps to

§  Determination of the Credit rating of the customer.

§  Assessing the credit risk associated with the customers by studying the credit payments of the customers.

§  Maintaining and building the customer relationship.

§  Detection of late payments in advance.

§  Preventing and avoiding bad debts from arising.

Problems Arising From The Improper Credit Management

          Improper Credit Management gives rise to big problems such as

§  Cash Crunches in Business.

§  Increase in Bad debts.

§  Increase in Debts to creditors.

§  Inadequate working capital.

§   Affecting day to day operations.

§  Low cash conversion or cash inflow.

§  Losing Credit Rating.

§  Unable to take benefits of cash discount from suppliers.

Advantages of Credit Management

§  Increase in cash conversion or cash inflow.

§  Low bad debts.

§  Increase in profitability.

§  Increase in liquidity.

§  Helps to increase production level and lower the cost.

§  Builds Credit Rating and brand reputation.

§  Efficient management of working capital.
             I hope know you have understood what is credit management means, objectives of credit management, importance of credit management and also problems arising from improper credit management and lastly the advantages of credit management. Thus to conclude credit management plays a very important and vital role in the business so that the business runs smoothly without any liquidity or cash problems.