How to Draft a Credit Management Strategy

  • A solid credit management strategy is a prerequisite for ensuring stable liquidity of a firm. A credit management policy offers various benefits like enhanced credit rating and a strong cash position. It also helps in alleviating risks of non-payment, refused shipments and customer bankruptcy.

    The difficulty in this process is the drafting of the strategy. Most large corporates and SMEs avail the services of a credit management agency to manage their credit. However, if you still need some help in formulating a credit management strategy, here are the basic factors to consider: (Information Credit – https://www.accountability.co.za/group/quality_services.php)

     

    1. Studying the Market Terms – Every market is unique and operates in a different way. You will have to study the market and the trends of payment to establish a strategy that does not go against the norms of the market. You can easily collect such information by interacting with banks and credit institutions. If the market is open, you can enforce any norms you wish. However, if the market has a set of standard terms, you will have to enforce norms that are in line with the market trends.

     

    2. Customer Checks – Probably the most important part of a policy is its enforceability. Conduct thorough background checks and study the payment history of your customers. Ask questions like – are they slow payers? Do they conform to market payment practices? This will help you in establishing terms of payment that the customers can easily comply with. This will help in diminishing the likelihood of non-payment.

     

    3. Risk Capacity – The primary defining factor of a credit policy is the company’s ability to take risks. If you can take up significant risks, you might allow a longer credit period to the customers. Alternately, if you cannot take up risks, it is advisable to keep the credit terms as short as possible, and within the domestic environment.

     

    4. Operational Strength – Another important element to consider is the operational strength of the organisation. When determining the credit period, you must consider the time taken for the goods to be transported and delivered to the customers. Many organisations consider the credit period from the date of delivery of goods to solve this problem. The time needed to process the invoice and collect the payment should be also considered by you.

     

    5. Provision for Non-Payment – In the event of non-payment, your credit policy should clearly state the provisions and the possible events. This will give your customer a clear idea of what are the legal steps you might take against them. You will also need to consider the possible options for you like litigation, out of court settlement etc., to be able to effectively draft your strategy.

     

    6. Current Market Scenario – Lastly, you will also have to consider the current condition of your market. Factors like the political scenario can play a huge role in determining the level of support you can expect from the government. Also, if you are operating in a less established market, you must keep your credit period short and proceed with caution.

     

    After careful consideration of the above factors, you will be able to draft a functional credit management policy that will ultimately increase the profit-making of the company and prove instrumental in generating more sales.

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