The purpose of credit management is to develop a process for extending credit and collecting consistent with your company’s commercial and financial objectives. The goal is to achieve your cash flow targets. If you do not already have an active credit management plan in place, here’s why you should:

Credit Exposure

Credit management includes managing your overall credit exposure. If outstanding AR grows because of a recession, cash flow will decrease. In an economic slowdown, sales decrease but accounts receivable can balloon due to customers conserving cash. This can lead to disaster just when you need cash the most.

You need to monitor your overall credit exposure to make sure you don’t get snared in a cash trap and take corrective action as necessary.

Credit Terms

If you experience a drop off in collections, you may need to change credit terms to protect your cash flow. As the economy continues to be erratic, industry “norms” may no longer conform with traditional industry credit terms or your past practices. With the recession, combined with unprecedented inflation, it may be wise to shorten credit terms, offer cash discounts for early payment, and in risky situations require deposits or full payment in advance. This will effectively increase cash flow and reduce bad debt exposure.

Credit Limits

Credit limits may need to be reviewed to protect your 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 supply chain and workforce abnormalities, it is advisable to reduce credit limits to avoid unforeseen surprises. This will create more work for your team, but it will protect your cash flow and reduce time spent on collections.

Credit Procedures

To protect cash flow, you may need to send payment reminders earlier and more frequently. However, depending on your industry, text and email outreach are 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. This is where AR automation can help free time to make these important calls.

Bad Debt

If you experience an unusually high amount of uncollectible invoices, you can minimize the damage to cash flow by giving your collectors the authority to work out payment plans. This will 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, increasing cash flow and giving customers more options to pay.

Leveraging Tools and Technology to Monitor Credit Risk

Monitoring credit risk is done more efficiently and effectively with automated credit and collection solutions. Sage AR Automation has a number of solutions which can help you monitor credit risk including:

  • Custom Credit Scoring Model: Calculates credit score based on values and weighting assigned to factors you think are the best indicators of your customers’ credit quality.
  • Dashboard Reporting: With a glance your team can see a customer’s account status, custom credit score, days past due, available credit, D&B, Experian, TransUnion; and whether the account usually pays on time or late and by how many days.
  • Automated Customer Communications: Automated emails or text reminders based on the status of customer invoices.
  • Activity Management with Smart Activities: Prioritizes activities for your team based on account information.