1) Introduction to credit management Flashcards
What is credit management?
Credit management (or control) is the process of managing customers who pay on credit so that settlement of debt is made on time.
What is liquidity?
Liquidity is a measure of the extent to which a person or organisation has cash – or can raise cash – to meet immediate and short- term liabilities.
What involves liquidity management?
Liquidity management in an organisation involves the timing of cash inflows and outflows – including financing and investing – so that the organisation has sufficient working capital (current assets less current liabilities) and remains solvent.
What are the main sources of liquidity, in order of liquidity?
1) cash,
2) bank deposits,
3) trade receivables,
4) inventory.
What is the overall aim of this course and what are the main topics of this course?
This book concentrates on the management of trade receivables through efficient credit control
1) The granting of credit,
2) The monitoring of customer accounts
3) Effective collection of debts.
What are external methods of improving liquidity?:
What kind of service do they provide?
What financial services are there available?
There are a number of financial services available to organisations which can help them with debt collection and the avoidance of irrecoverable debts.
These services include:
1) Credit insurance
2) Factoring
3) Invoice discounting
What is credit insurance?
Insuring against the risk of non-payment.
What is factoring?
Who is in charge of the sales ledger?
What benefit does it provides to the company?
A factoring company lends money to a business against the value of its trade receivables.
The company then settles the debt with the factoring company which takes over and runs the sales ledger.
This provides the business with liquidity before the due date.
What is invoice discounting?
Who is in charge of the sales ledger?
A finance company lends money against invoices issued to selected customers of the business, but the business continues to operate its own sales ledger and credit management system so that the customer does not realise that the finance company is involved.
What is an important element of liquidity management?
An important element of liquidity management is the efficient functioning of the sales ledger – or in basic terms, customers paying up on time.
What are the credit control activities?
1) Assessing new applications for credit (either from new customers or from existing customers looking for an increased credit limit)
2) Monitoring sales ledger accounts by using reports such as the receivables (aged trade receivables) summary.
3) Chasing overdue debts and dealing with irrecoverable debts.
What are the external sources of information about customers?
1) Bank references:
2) Trade references:
3) Credit circles:
4) Credit reference agencies:
5) Companies House:
6) Other published sources:
7) Management accounts:
Each source, when considered in isolation, will have limitations.
What kind of information banks provide about prospective customers?
Banks have traditionally been a valuable source of information about the credit standing of prospective customers.
When translated into plain English, bank references are limited but useful indicators of the prospective customer’s creditworthiness.
What are trade references?
Are they always reliable?
It is common practice for organisations to ask for two trade references when assessing a customer’s credit risk.
These are not always reliable because the prospective customer might give as references suppliers who are not strict about credit control, and avoid quoting the suppliers who are red hot in chasing debts.
What are credit circles?
They are a group of businesses in the same trade who exchange information about customers they have in common, and particularly those who may be experiencing cash flow problems. They are often members of a trade association.
