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:

• risk of losses and provisions for bad debts,
• risk about working capital requirement and cash flow,
• risk of depreciation of value due to inflation,
• risk of excessive consumption of financial resources with result an incapacity to make investments for your business.

It is more difficult to determine the opportunities of receivables:

• it is often a business requirement to grant a payment to your customers. By this way you finance the activity of your client. This is precisely what he is requesting even if he does not formulate this need in these terms,
• ability to discount your receivables to get cash faster compare to the due date of your invoices.

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. 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 in Credit Management will be the output of this objective.

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Some examples of strategies of Credit Management

Objective	Strategy	Method	Advantages	Disavantages
Improve its investment capacity	minimize the receivables	negotiate payment terms reductions with your customers against discount discount your receivables (factoring, discount of bills of exchange) agressive collection of your receivable negociate down payments	massive reduction of working capital and increase of your investment capacity	cost and profitabilty impact
Maximize profitability	secure your receivables	use credit insurance or bank guarantees systematically	limitation of risk of default low cost	high working capital negative commercial impact
Develop its sales	Flexibility towards customers	grant long payment terms no request of guarantees or down payments flexible collection process	contribute to the sales development at short term	high risk of unpaids and high working capital loss a credibility if collection is too flexible with customers

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.