Definition of Credit Management:

A function performed within a company to improve and control credit policies that will
lead to increased revenues and lower risk including increasing collections, reducing credit
costs, extending more credit to creditworthy customers, and developing competitive
credit terms. Also called credit control.

PROCESS OF CREDIT MANAGEMENT:

1. Lending Process:
Ralston and Wright (2003) develop two elements to high quality lending practices
from their study on credit unions. The first step is obtaining systematic identification
of risk of each loan applicant. Saunders (1997) further agrees that it is necessary for
financial institutions to measure the probability of borrower default. However,
Thomas (2009) stresses that measuring the riskiness of a borrower can be difficult as
the problem of moral hazard could arise. Secondly Ralston and Wright (2003)
order to incorporate the high risk of a borrower. In general the presence or absence of
these elements may be significant for credit unions regarding their credit management
processes.

2. Credit limits:
One of the main functions of a financial institution is to realise proper control over
credit. Bessis (2002) underlines the importance of executing a limit procedure so as to
avoid any single loss that could endanger the financial institution. Dekker (2004)
argues that it is the lending officers role to place an instalment period and princi ple

amount that would complement the affordability of the borrower.

Tips for effective credit manangement:

1. It is essential to include sales, finance, operations, and customer services in
communication to help understand the credit management (order to cash) process make
sure you understand your customers and their customers, i.e. the supply chain.
2. Communicate with your customers by phone, not impersonal e-mails, and make them
your partners.
3. Use on-line payment systems so that customers can pay at any time, whenever they
want rank salesmen/women and sales offices as to their success in credit management,
and publish the results to drive improvement.
4. Group and report your disputes by age, e.g. Green - 1 month, Amber - 2months, Red 3 months, with the aim of Credit Policy allowing the Credit team to take control in month
4 to credit the customer if still not resolved.
5. To ensure there is on-going validation and improvement of all processes including,
getting feedback from everyone including customers, colleagues and management train
and retain good credit management staff produce and communicate simple and regular
metrics of the departments performance.

3. Credit Checking:
Most commercial enterprises are sales-driven, which is to say that a great emphasis is
placed on finding new customers and getting customers to place product orders. The
function of credit management in this process is to check the creditworthiness of
prospective new customers and continue to monitor the creditworthiness of existing
customers. It may be that some prospective customers have such a bad credit rating that it
is not worth doing business with them. Credit management is also responsible for
negotiating payment terms and conditions with new and existing customers with the
intention of minimizing the potential exposure to bad debt. For example, if a customer
orders products monthly but only has a payment due every three months, credit managers

might renegotiate the credit terms offered to this customer if they suspect that the
customer's credit rating has lowered. Monthly terms, or even cash on delivery terms
would minimize the amount of outstanding bad debt owed by the customer.

4. Invoices and Billing:

Credit management is responsible for ensuring that invoices, statements and bills are
issued to customers, reflecting accurately the current status of the customer's account and
the amounts and details of payments due. Invoices must be dispatched early enough for
the customer to have time to evaluate the details contained in them and make payment by
the due date. An important credit management function is the checking of the details of
invoices and statements for accuracy. Inaccuracies could lead to the customer disputing
the invoice, resulting in a subsequent delay in payment, which would then adversely
effect cash-flow.

5. Credit Collection:
Credit management officers are responsible for identifying bad debts and for taking steps
to recover bad debts. This can involve the renegotiation of lines of credit (the cash-value
of goods and services that will be supplied to the customer on account), renegotiation of
terms of payment for subsequent purchases, and the negotiation of terms to repay
currently outstanding amounts. Where a customer is not willing or able to negotiate the
repayment of a debt, credit management officers may decide to pass the debt to
commercial credit rating and credit collection agencies. In extreme cases, civil actions are
instigated, allowing the courts to mandate the recovery of the debt.

Cash flow Three credit management best practices to help

protect :
1. Develop a credit policy:
This is the boring but important phase of credit management, but dont be tempted to
skip it, as it will make the rest of the credit management process a lot easier.

What should be in your credit policy?

1. Objectives: What is the purpose of this policy? Generally, to provide a reference on
the businesses you will extend credit to, under what circumstances, how much, and under
which terms.

2. Credit approval process: Set out the steps for how you will deal with new
debtors, including assessing creditworthiness.

3. Credit limits: Define the factors that contribute to each customers credit limit.
You may decide that all new customers will be held to a certain limit until they have paid
a set number of invoices on time, or you may choose to set limits according to the
customers risk rating.

4. Credit terms: Terms should include the length, for example 30 days, and any
disincentives for late payment, such as interest charges. The debtor must declare in
writing that s/he understands and agrees to these terms to make them enforceable.

5. Monitoring and reporting: Using CreditorWatch you can monitor your debtors
for adverse information (court judgements, defaults and ASIC changes). Evaluate your
debtors regularly, for example every quarter.

6. Response to bad debt: Set out the actions you will take if a debtors account falls
in arrears. This may include a warning process, possible consequencessuch as lowering
credit limits or withholding credit, or shortening termsand a collections process, for
example refinancing the debt, mediation/arbitration, using a debt collection agency or
litigation.
This is the boring but important phase of credit management, but dont be tempted to
skip it, as it will make the rest of the credit management process a lot easier.

2. Assess your debtor:

Especially in tight times when you are keen to make a sale, it is easy to overlook this step
in favour of blindly and enthusiastically accepting a new customer. Debtor assessment is,

however, probably the most important part of credit management as it tells you whether
to extend credit, how much, and what to expect from the debtor. Dont let a customer
become a liability. Firstly, run a check on the customer to make sure it is a legitimate
business still trading. To do this, you need the customers Australian Business Number
(ABN) or Australian Company Number (ACN) to determine the business name and any
trading names it uses. Run those details through a credit reporting agency, CreditorWatch
will alert you to any defaults or court actions that may be pending.

3. Manage risk:
Credit assessment and act accordingly if there are signs of trouble. In many cases, timely
communication with the debtor is all it takes to keep the payments on track and the
relationship in check. Risk management is about allowing for contingencies that benefit
you in the long term, so a good credit policy should allow for financial mishaps and offer
solutions that help you avoid expensive, time consuming consequences like litigation
while keeping the customer relationship intact.