Credit Management Flashcards
“Remember, that money is of prolific, generating nature. Money can beget money, and its offspring can beget more, and so on… The more there is of it, the more there is of it, the more it produces every turning, so that the profits rise quicker and quicker”
Benjamin Franklin
the discipline of reviewing, analyzing and setting the term of requests for credit for a business
Credit Management
series of interlinked processes and workflows that allow your accounts receivable team to manage business’s cash flow by following up on payments and collecting overdue invoices ASAP
Credit Management
involves pursuing the payment of debts that are past due, process of contacting the borrower who owes the debt and negotiating a payment plan or requesting immediate payment in full
Debt Collections
Main Components of Credit Management
Assessing an approving new clients, Setting Payment terms, Extending credit to existing customers, Tracking customer credit
Primary Objective of Credit Management
Avoidance of excessive debt
Key objectives of Credit Management
Safeguarding Customer Risk, Settlement of outstanding balances, Improving cash flow
Functions of the Credit Department
Gathering Credit Information, Analyzing Credit Information, Credit Checking and authorization, Filing and Recoding, Credit Adjustments, Collection Correspondence
In charge of applying the standard tests and measurements for performance
Credit Analyst
Risk of repayment, the possibility that an obligor will fail to perform as agreed
Credit Risk
also a source of liquidity when used as collateral for borrowings
Loans
present primarily in the loan disbursements and credit administration processes
Transaction Risk
Risk associated with lending
Credit
Liquidity
Transaction
Compliance
Reputation
Primary Advantage of Credit Management
Business Continuity
Ensure that delinquent accounts are reconciled and paid in a timely, cost-effective manner
Collection Department
Factors to Consider in Deciding the Collection Department Structure
Based on Operational Duties,
Based on Skills
Based on Operational Duties
Frontline Contact Centre,
Back office,
Control Team
deals directly with customers
Frontline Contact Centre
Accounting and Settlement Tasks
Back Office
Centralizes all processes at the firm
Control Team
Based on Skills
Evaluation of the operation volumes,
Evaluation of the responsibilities on all credit and collection procedure
RACI Matrix
Responsible
Accountable
Consulted
Informed
Customer Care Department
Responsible
Finance
Accountable
IT, Marketing Sales
Consulted
VP Sales, Marketing, Finance
Informed
Common staff of collection Department
Credit Analyst
AR Manager
AR Analyst/Collection Analyst/Collection Specialist
Collector/Collection Officer
Compliance Analyst/Collection Risk Management Specialist
Collections Consultant/ Treasurer
Parameters that influence collection department structure
Volume of Invoices, Payments, Receivable Accounts
Number of Active Customers
Payment Methods
Measure of the average number of days that it takes a company to collect payment for a sale
Day Sales Outstanding
Importance of DSO
A key driver of cash flow,
A key indicator of a company’s financial health,
Factors that lenders and investors consider when evaluating a company’s creditworthiness,
Used to assess customer satisfaction
(AR/Total Credit Sales) x Number of Days
DSO
Ideal DSO
45 days
DSO can be affected by:
Seasonal Fluctuations and Changes in credit terms
He should know and understand the goals, objectives, and policies of the company, of the other company, of the other departments in the organization, and of his own department.
Competence and Capability
A good credit man must have the ability to effectively convey his ideas.
Communication
putting your attention on advantageous solutions, attempting to forge relationships that benefit both parties, and bringing value to the company. He must take a proactive and constructive stance when managing credit and collections.
Constructiveness
He must keep pace with changing times and changing conditions.
Creativity
He must be devoted and dedicated to his job.
Conscientiousness
He must be consistent in making credit decisions.
Consistency
He must not only act with certainty and accuracy but also with swiftness and speed.
Certitude and Celerity
A credit man must have good skip tracing skills, maybe in the field or online, in order to gather and verify the information given by the customer.
Contact
He must also have character, honesty, integrity, and reliability.
Character
He must be trusted by the debtor to have reciprocity of confidence between the credit man and the customer.
Confidence
He must have basic knowledge of computers and the ins and outs of information technology.
Computer Literate
people equipped with pleasing personalities.
Congeniality
handling the concern of customers regarding the credit process makes them feel that they are respected.
Considerateness
He should have the fundamental capacity for perception, understanding, and judgment that is possessed by almost everyone.
Common Sense
