How to create a credit management strategy


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Define your credit management process
First, take a close look at the credit management services and practices currently employed by your company:

Who is in charge of managing credit: A team? An individual? Or busy executives who may not have the time to make accurate credit decisions?
What are the rules in place linked to payment terms or to your late payment process?
If you don’t have a credit and debt management process in place yet, here are a few elements you can start with:

Calculate your average Days Sales Outstanding or DSO (the average number of days it takes you to collect payment from customers) and compare it with that of your industry.
Check if on average you are paying suppliers before payments are coming in. If so, you may need to adjust your billing cycle and payment terms.
Maintain a healthy diversification in your customer portfolio so that you’re not relying on one big customer.
The whole company should become familiar with credit risk management best practices, which include optimising contract management and accounts receivable collections, identifying and analysing the risk of new clients defaulting on payments and creating a proactive credit risk mitigation plan. You should define the actions you require in credit account management from other departments and make people accountable.

Finally, your credit management process should seek a healthy balance between avoiding risk and seizing opportunity. Being overly cautious can mean missing out on some sales opportunities, while being too lax could make you miss the signs of a risky customer.

Establish client creditworthiness
Being proactive plays an important role in managing credit – in particular, understanding your clients’ financial picture.

New clients are a welcome addition to any business, but make sure they do not become a liability: identify and analyse their risk of defaulting on payments by creating a proactive credit risk mitigation plan. This is an important step in credit and debt management.

Even existing customers should undergo a periodic reviews process. Just because you have a good relationship with a customer doesn’t mean they are impervious to default.

Chambers of Commerce and credit bureaux, bank and trade references, etc. can reveal a customer’s most up-to-date financial activities, as well as their cash flow status.

So take a look at the customer’s specific industry and market and note the comparison with the economic performance of closely-related industries.

Managing credit becomes more complex when conducting business with foreign customers because it can be difficult to interpret and understand information used by foreign countries to measure creditworthiness.

When assessing an international client, include country risk rating report, such as fluctuations in currency exchange rates, economic or political instability, the potential for trade sanctions or embargos, etc.

Overall, audited financial statements are the best way to understand a company’s financial picture, though some privately held customers may not be willing to share these with you. A customer credit vetting tool like Allianz Trade TradeScore can help, as can trade credit insurance. They give you indirect access to financial information and help you with credit and debt management.

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2023-05-09 22:53

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