The purpose of credit management is to provide a process for extending credit and collecting accounts receivable consistent with your company’s commercial and financial objectives. The goal is to achieve cash flow targets.
Credit management has been become a major challenge in the new normal. Many companies are forced to be reactive instead of proactive in practicing credit management because of the rapidly changing economic environment. It is more important than ever to maintain a disciplined approach to practicing credit management to protect your cash flow.
Here are some reasons why you should be practicing credit management to protect your cash flow in the new normal.
Credit management includes managing your overall credit exposure. If accounts receivable grow because of a business recession, cash flow will decrease. In a business slowdown sales decrease but accounts receivable can balloon due to customers conserving cash by stretching accounts payable. Accounts receivable can turn into a cash trap just when you need cash the most. You need to monitor overall credit exposure to make sure you don’t get snared in a cash trap, and take corrective action if necessary.
If you experience a drop off in collections, you may need to change credit terms to protect your cash flow. In the new normal it may not make sense to follow industry credit terms or your past practices. With many businesses struggling to survive until the economy recovers, it may be wise to shorten credit terms, offer cash discounts, and in risky situations require deposits or cash in advance. This will increase cash flow and help to reduce bad debt losses.
Credit limits may need to be reviewed to protect cash flow. If you only do credit reviews once a year, you may not be aware of unfavorable changes in a customer’s financial situation. In industries heavily affected by the new normal, it may be advisable to reduce or eliminate credit limits to avoid unwelcome surprises. This will create more work for your team, but it will protect cash flow and reduce time spent on collections.
To protect cash flow you may need to send payment reminders earlier and more frequently. However, text and email contact is not as effective as a personal call where collectors can leverage personal relationships. Phone calls take more time so you need to make sure collectors are not tied up in clerical collection activities.
If you experience more uncollectible accounts, you can minimize the damage to cash flow by giving your collectors the authority to work out payment plans. This will probably yield faster results and a larger recovery than if you use a collection agency.
Practicing credit management will help to protect your cash flow, but it will require more time of you and your AR team. Automated credit and collection solutions can help you stay ahead of the curve and increase cash flow.
Lockstep Collect, a leader in cloud-based credit and collection platforms, provides automated solutions for effectively and efficiently managing credit. Lockstep Collect is an experienced software partner that can help you navigate the challenges of credit management in the new normal.
If you would like to learn more about how you can benefit from automated credit management solutions, please contact Lockstep Collect at www.lockstep.io.