Importance of credit and credit management

Credit is essentially any money coming into a business, either now or at some point in the future. This could be cash that is paid in by lenders (such as banks), shareholders, or other investors. Or it could be a payment that is owed by a customer once a sale has taken place.
If finance teams don’t manage credit appropriately, it could impact their bottom line in a negative way.
Credit management
Credit management is the activity of determining reasonable credit terms and then collecting payments when invoices are due. It may also mean to avoid excessive debt or avoid borrowing any money that you can’t pay back easily without straining your budget or getting behind on payment. It’s important for there to be an ongoing connection between sales and finance activity, to reduce risk as much as possible and to keep credit-related data accurate.
It is common for B2B companies to buy and sell on credit, because this can be an effective way to improve existing partnerships and to forge new ones. It’s a useful method for getting sales over the line too, as customers can be attracted by not having to pay right away. It’s also seen as a convenient way to trade, as businesses can work around their preferred timescales.
The financial health of your company may be dependent on finding ways to avoid late or missed payments. Customers that are prone to these scenarios can threaten your business’s prosperity if left unchecked. However, it can be difficult to analyse new customers and track existing ones in terms of their creditworthiness.
Financial struggles among small-to-medium-sized businesses are in many cases caused by a failure to ensure invoices have been paid. Larger companies are perhaps better equipped to deal with these losses, but it will still impact their profitability and growth.
Benefits of effective credit management?
• Minimise risks Having a clear picture of your company’s finances is one of the most beneficial aspects of credit management. With clarity you can avoid unnecessary credit risk and take advantage of previously unseen opportunities.
• Improve cash flow By continuously assessing income and expenditure, it’s easier to take actions that ensure the incomings are exceeding the outgoings. As a result, it’s far more likely that payments such as bills and salaries can be paid on time.
• Avoid late payments Bad debts can be prevented, and the number of late payments made by customers can be reduced by detecting them earlier. This also reduces the likelihood of your company experiencing adverse effects as a result of a default.
• Increase liquidity An asset’s liquidity refers to its ability to be converted into cash simply. Stable and consistent income from customers is one of the main sources of healthy liquidity for businesses.
• Better debt recovery Debt recovery can be completed in a much smoother manner, at a much faster rate, and with as little effort as possible, while also ensuring none of the debt is missed. There’s also less tension between the payer and payee.
• Enhanced reputation among lenders Lenders are more likely to look fondly on businesses that have efficient methods for retrieving the credit they are owed. And these lenders will be more willing to provide credit to those that can demonstrate healthy cash flow.

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