Importance of Credit Management

Tally Solutions |Updated on: August 23, 2021

Credit management is considered as an important activity for every business. To put it simply, credit management process involves two activities. Firstly, it is about ensuring that your customers pay you on time for the goods or services you sold to them. The second and equally important activity in credit management process is to ensure that you pay your suppliers on time. Extending credit to your customers brings with it the risk of them not paying you. However, most B2B businesses are necessitated to extend credit.

Many SME businesses focus more on sales and tend to neglect credit management. However, it is prudent to note that SMEs are especially vulnerable to unpaid debts and late payments from customers. Bad debts are the cause of thousands of bankruptcies every year.

A sale on credit is equal to granting a financial loan to your customer. It is a loan on which you don’t earn interest and it is not secure, because you can never be sure that your customer will pay you. Hence, managing credit optimally is a key factor for your business’s growth and survival.

In this article, let us understand the importance of credit management in your business.

Ensures optimum cash flow

A business can function only when it has enough cash flow for its various activities. Managing credit is a key factor in ensuring optimum cash flow. When you manage credit (both receivables and payables) in your business effectively, you ensure that your business runs on its optimum cash flow. On the contrary, when you don’t keep track of the money that you have to receive from your customers, your capital remains locked, which could have been used for more profitable purposes. Similarly, when you don’t keep track of the money that you owe your suppliers, you become liable to pay interest and/or other penalties that your suppliers may charge you. This again hits your cash flow.

Contributes to a good reputation in the industry

Reputation is everything for your business. The consistency and commitment with which you pay your suppliers can build your reputation for credit payments strongly. This will mean that more suppliers would want to do business with you and would be willing to extend favourable credit terms to you. Your reputation for paying your suppliers also gives you a better standing to expect clear payment terms from your customers. Hence, good credit management process is essential to build your reputation in your industry.

Protects your financial stability

Thousands of companies disappear every year because of 1 or more invoices which were unpaid by their customers. The repercussions of money unpaid by your customers can be manifold and can exceed all your forecasts. Your financial performance and growth can get stunted if you don’t manage the money you ought to receive from your customers.

Helps create long-term relationships with customers and suppliers

Effective credit management helps you weed out customers who run the risk of non-payment. This ensures that you select your customers carefully, which in turn, gives a higher probability of creating long-standing relationships. Similarly, regular payments to your suppliers on time help build credibility with your suppliers. These long-standing relationships are important for your business to grow.

Avoid additional costs of credit

When you don’t manage credit optimally, you become prey to penalties and interest that your suppliers may levy. On the other hand, when you don’t receive due amounts from your customers, you would be required to spend additional time and money to coerce your customers to pay. All these become additional costs for your business. Managing credit well ensures that you can avoid such costs to a large extent.

Hence, credit management is crucial for your business. The sooner you put in processes for credit management, the better it will be for your business. Managing business credit well is nothing short of an art. Businesses who get it right can truly ensure that their cash works for them, while they work for their business.