Credit management has become critical in the new normal. Many companies are delaying payments to suppliers to conserve cash because of the uncertainty. Credit rating information has become less reliable. Procedures for granting credit and setting credit limits are often out of sync with the realities of the new normal.
Many companies need to revisit the way they handle credit management, but before you start changing credit policies and procedures, take a minute to review the basics of credit management. Here are the basic elements of credit management you should make sure you understand.
Credit management should start with a sound policy that addresses the framework of how to manage credit including:
- Risk – The amount of bad debt losses and credit exposure that is consistent with your company’s goals.
- Approval process – Guidelines for approving credit
- Credit limits – Process for setting credit limits
- Credit terms – Terms of payment
- Collection procedures – Process for collecting accounts receivable
- Bad debt procedures – Process for dealing with uncollectable accounts
With uncertain business conditions, new approaches may be needed to deal with each of these elements.
The amount of bad debt losses and credit exposure that your company can risk may need to be reduced. It is not clear how long it will take for the economy to recover and whether certain industries and companies will recover.
It may be necessary to tighten up your approval process for a number of reasons including:
- Increased risk for certain industries and companies
- Credit reports, which have a number of drawbacks to begin with, may be unreliable.
- Bank and trade references may be of limited value because of rapidly changing business conditions.
- Company financial statements and ratio analysis may be based on information that is stale and of little value.
Credit approval is typically based on historical information, which is of limited value in a rapidly changing economy. It may be necessary to rely on anecdotal information from conversations with banks, suppliers and competitors until the economy recovers.
It may be advisable to reduce or eliminate credit limits for riskier customers, so that all orders come up for credit review.
Many companies offer credit terms common to the industry they are in. This may not be practical in the current economic environment. You may need to offer alternative terms to riskier customers such as:
- Shorter payment terms
- Cash discounts
- Deposits or cash in advance
Make sure there is buy-in from all stakeholders before changing a customer’s terms. When the economy recovers, customers will remember who supported them or not.
More aggressive collection procedures may needed including:
- Earlier and more frequent reminder emails or texts
- More collection calls with emphasis on personal relationships
Bad Debt Procedures
Delays in bad debt actions increase losses. Give your collectors authority to work out payment plans. It will probably be less expensive than using a collection agency.
Credit management is more important than ever. Re-examine your credit policy and make the adjustments needed for the new normal. Automated credit and collection solutions can help you stay on top of the rapidly changing environment.
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.