Credit management in a recession

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Information about Credit management in a recession
Business & Mgmt

Published on October 12, 2012

Author: Nigelsth

Source: slideshare.net

Description

Recession
In a recession the problems of credit management become more acute for two basic reasons; first previously good customers may well face new problems and their ability to cope with them will influence their ability to maintain their payments to you; secondly, there will be additional pressure upon the credit department to support the sales department by approving orders from customers who would not normally be considered of prime credit worthiness.



Cash Collection

The granting of credit means taking a risk. There is no guarantee that goods and services received on credit terms will be paid for or paid on time. All suppliers must therefore have procedures which encourages the customer to repay as agreed, hence a cash policy.

A developed cash policy is essential if sales are to be turned into cash at a rate which enabled current liabilities to be met promptly.

Credit Management in a RecessionBy: Nigel D.St.HillBasic FunctionCredit Management is the management of one of the business’most valuable assets – its receivables – this starts with theassessment stage right through to collection. Effective CreditManagement yields a substantial pay back in reducedborrowing, interest saved and improved liquidity. It is notsimply a “debt chasing” exercise as it is so often referred to.Credit Management depends on the creation and implementationof a credit policy which establishes systems and procedures foropening and monitoring accounts; defining the credit worth ofthe customer; establishing the terms on which goods or serviceswill be supplied; and collecting payment when it is due.

RecessionIn a recession the problems of credit management become moreacute for two basic reasons; first previously good customers maywell face new problems and their ability to cope with them willinfluence their ability to maintain their payments to you;secondly, there will be additional pressure upon the creditdepartment to support the sales department by approving ordersfrom customers who would not normally be considered of primecredit worthiness.In a recession the survival rate of your own company is the firstconsideration. The immediate reaction might well be to decide

that the credit policy should be tightened to ensure that thecompany is not exposed to any greater credit risk than before.This is the reaction of most companies, at least initially.However, this is where the combination of expertise of sales andcredit departments comes to the fore. The real need is tomaintain sales at a profitable level and that may mean that it isnecessary to revise both the sales and the credit policies.Why should this be? First, if the market is in decline, the salesforce may be chasing orders from a smaller number ofcustomers or, because of contraction of the industry which stillhas the same number of companies within it, chasing largerorders from the companies still able to place orders. Either way,the credit department, has two problems; first should the level ofcredit be increased, perhaps by extending the period of creditgranted, perhaps by increasing the credit limits applied to

existing customers; secondly, should the sales force beencouraged to seek orders from companies who would notpreviously have been considered to be first-class risks-and if so,how should credit limits and credit periods be decided?Of course, much depends upon the nature of the business. Acompany with a wide spread of customers may be better placedto adjust credit terms for a few customers without upsetting themain credit policy. More likely, however, if one company startsto offer easier credit terms their competitors will not be farbehind, if they can afford it (or if they cannot afford it to lose thebusiness). Hard decisions have to be taken here. It is a verydifficult matter to decide to start a credit war. If you grant easierterms and your competitors match them, both of you have lost,unless by doing so you have kept going some customers whowould otherwise not have survived. However, that is more a

case for individual decision, within the overall credit policy,rather than for a blanket credit policy decision such as wasconsidered here.© Nigel D St.Hill 2012 All rights reserved.Nigel D St.Hill is a Life & Money Management coachwith over twenty-five years experience in moneymanagement credit management and change management.To learn more about money matters visit:http://moneyandabundance.com

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