Strategy in Credit Management
|What stakes for which strategy of Credit Management?
The accounts receivable are usually around 25% of total assets, although this ratio depends strongly on the business sector (trade, industry, services…).
It is therefore very significant for many businesses and very consumer of financial resources without being remunerated. It can be considered as a permanent financial weight for companies.
Accounts receivable are an amount of money at risk. This risk has to be managed so that financial resources of your company scattered among your customers (bills issued but not paid yet) do not create bad debts with negative consequences for your business.
We can identify four main risks associated with receivables:
What is the strategy?It can be defined as following: "The strategy is the definition of coherent actions involved in a logical sequence to achieve one or several goals." ».
The strategy has a long term objective.
So, you need to define your credit management strategy and answer to the questions: why do you want to do this and how you’ll do it.
It depends mainly on your business' financial structure and profitability, the weight of your receivables and your business overall strategy.
Credit Management strategy shall be fully inserted into your business plan. It should be determined by financial constraints your business plan imposes to you.In fact, the choices you have to take on the management of your accounts receivables have an impact on the profitability of your business and on its working capital and investment capacity.
Your strategy should be specified by a goal that you define by asking yourself the right questions:
Your strategy in Credit Management will be the output of this objective.
Some examples of strategies of Credit Management
Obviously it is desirable to balance these objectives described here drastically. You have to define the direction you want to take and how far you go into your strategy.
For example a sales increase goal may include a defined risk level of a maximum amount of outstanding credit risks or the establishment of a credit insurance type excess of loss in order to prevent high losses due to unpaids.
Define a clear strategy is essential to properly manage its accounts receivable.
This implies that a deep analysis is conducted with sufficient perspective.
It concerns the whole quote to cash process. Therefore, it is not limited to credit management / finance departments but concerns all actors in the company. All (sales managers, customer care...) must be aware of the rules coming from this strategy.
This tools also allows to calculate the average cost of financing of your company.