What is credit management and what's the role of the credit manager? (2024)

Credit Management, meaning the management of credit granted to its customers, is a discipline increasingly identified as strategic by companies.

What is credit management?

It is actually a very down-to-earth job whose purpose is the raison d'être of any company and any work whatsoever:

To get the income of its labor, which is to say in the economic world we have lived for the past few centuries: to be paid by its customers!

This concept is fundamental to the sustainability and development of any business.

It seems obvious! In fact, it is not!

Hundreds of thousands of companies disappear every year in the world because they have suffered 1 or more unpaid invoices from their customers. Much more are impacted in their financial performance and development for the same reason. It is the same in all countries around the world.

This risk is one of the most important that companies have to face. It is necessary to assess, control, and optimize this risk. This is the job of the Credit Manager.

Root causes are multiple: insolvency of the client, litigation, administrative, technical, or commercial discrepancies, laxity in the recovery of debts or in receivable management, etc. Credit management is therefore a very powerful tool to identify the dysfunctions of your company's internal processes and then correct them.

Why do we hear little about Credit Management?

Credit Management is particularly developed in large companies around the world. It is not the case in small and medium companies, especially in Latin countries where businesses are culturally focused on sales and tend to neglect this critical management.

This situation is totally paradoxical because the specialists in the Trade Receivable management, the credit managers, are absent where they would be most needed: in the SMEs and SMIs, which are the most fragile companies in cases of unpaid debts and late payment

This discipline struggles to impose itself in the commercial culture of companies (although we can see some progress), and it may seem difficult to address issues related to the payment of bills during commercial negotiations. This is a serious mistake because it is at this time that the payment conditions are set. Credit management principles should be included in SMEs / SMIs to avoid bad debts, which cause thousands of bankruptcies per year.

To integrate Credit Management in his business, it is first necessary to understand that making a sale with a payment term (even if only a day) is equivalent to granting a financial loan to your customer. A loan that is not remunerated (the interest rate is 0% unlike a bank loan), and that is not secured (you are not certain to be paid once the payment period elapses).

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So why do we grant a deferred payment to our customers?

The reason is first of all historical and dates back to antiquity and the beginnings of commerce.
The slow transport and communications imposed a lag between the delivery of goods and payment.

Payment methods widely used today, such as documentary credits and bills of exchange were invented at that time.

Nowadays, it is so obvious to invoice with a payment term that we don't realize what that means: a transfer to your customer of a vital element of your business: cash.

Either you absolutely trust your customers and pray that they pay you, or you apply Credit Management concepts.

Most of the tutorials on Credit tools are purely Credit Management as in below categories:

1. Evaluate customers solvency
2. Secure your receivables
3. Collect your invoices
4. Bad debt collection

This fifth section is intended to allow you to measure your performance in credit management by using the right indicators to manage your receivables and to give tips about organizations and strategies.

What does the Credit Manager ?

He / she intervenes in the full sales process of the company, from commercial prospecting to the final payment of invoices. He works in collaboration with the sales department and the legal department. He is responsible for the good management of outstanding customer, that is to say the turnover recognized and not yet paid.

To read: Credit Manager, anatomy of an unusual species.

Sales process steps:

Pre-prospection

• Determination of customer segments and types of associated risks.
• Setup of standard payment terms (payment terms, payment method)
• Contribution to the realization of the sales conditions, including key clauses (payment term, late payment penalties, clause of reserve of property, etc.).
• Realization of a Credit Management procedure defining transversal operating rules in the company.

Prospection

• Rating the creditworthiness of customers.
• Set up the credit limit based on business needs and the credit analysis done.
• Orientation of commercial efforts towards solvent prospects.

Contractualization

• Ensure the balance of the contract regarding the level of reciprocal commitments between the seller and the buyer (limits of responsibilities).
• Negotiation of payment terms (down payments, billing terms).
• Integration of standard contractual clauses (retention of title, suspension and cancellation clause, penalties for late payment, etc.)

Billing

• Validation of the process of issuing invoices (who invoices, on what order and how, compliance with the terms of the contracts, etc.).
• Validation of the content of invoices compared to the legal constraints (tax number, mentions about late payment penalties rate,etc.)
• Management of billing disputes with the aim of resolving them as quickly as possible and to carry out the corrective actions to no longer reproduce the error.

Cash collection

• Management of debt collection, which aims to obtain payment of invoices on their due date applying collection scenarios. It begins with a preventive recovery action (before invoice due date) and continues until the sending of a formal notice, required for any legal action.
• Management of litigation recovery actions with appropriate legal actions carried out directly or through a collection agency, a credit insurance or other provider.

Performance and optimization of the WCR

• Definition of an Accounts Receivable management strategy to reduce the Working Capital Requirement
• Monitor the performance with the appropriate indicators (DSO, overdue percentage, bad debt rate, ...).

The sustainability of your business, its profitability, its cash flow, and its ability to grow by its own financial resources depends on the performance in credit management.

The role of the credit manager also extends to AR accounting (invoice / receipt reconciliations, management of bad debt provisions, etc.) and to IT (ERP, credit management software), which are the tools that allow him to work efficiently.

Evaluate your performance in Credit Management

Function resolutely transverse, its performance brings together many departments of the company, from trade to accounting, from logistics to after-sales service. It is in the entire sales process that the keys to improvement are.

The AR item is a transitional item. Invoices are not intended to stay as they are cleared as soon as they are paid by the customer. Therefore, AR can be seen as a box in which all invoices corresponding to cases that have been mismanaged at one or more stages of the sales process fall: poor customer risk analysis, poor contractualization, poor payment terms, supply chain problems, poor recovery ... etc.

All these reasons result in the inflation of the AR, the increase in the WCR, and the decrease in profitability.

Improving performance means reworking each stage of the sales process. We call it the "quote to cash" process (from the realization of the quote to the payment of invoices).

No fatalism, the keys to the cash of his company (to be paid quickly and well), its profitability (avoid bad debts) are held by its leaders and employees, who alone do or do not take the necessary steps of an efficient credit management.

Evaluation of the performance with:

• The DSO,
• The overdue ratio or the percentage current,
• The bad debt ratio