The Credit Management Process: The Key to Achieving Financial Stability

Need for Credit Management Process

A good credit management process is significant for a business as it helps maintain financial stability and profitability. When done properly, businesses can forest risks and increase growth opportunities. 

Good credit management keeps businesses proactive and formulates strategies for identifying risks by evaluating possible losses and deliberately safeguarding against the risk of extending credit.

In addition, credit management plans protest a business’s cash flow by optimizing the performance as more than half of bankruptcies happen due to poor credit management. 

However profitable a business may be it can soon turn into losses if its receivables are not managed properly. Businesses spiral into debt when their working capital is less than required to settle the creditors and meet other expenses. 

Therefore an effective credit management process is crucial for business growth.

The Credit Analysis Process

The 5Cs of credit analysis include – character, capacity, capital, collateral, and conditions. 

• Character helps understand the borrower’s creditworthiness and how they will make repayments.
• Capacity defines how the borrower makes payments with their internally generated cash flow.
• Capital represents the borrower’s financial health and assesses alternative liquidity sources.  
• Collateral defines the physical assets of a borrower for security purposes. 
• Conditions define the loan’s purpose based on the external environment. 

Credit analysis is an integral part of the credit management process which is done by professionals to analyze a prospective borrower using different qualitative and quantitative techniques. The above factors are crucial for making a successful credit analysis. 

The qualitative credit analysis employs frameworks like PESTEL to understand risks associated with external environmental factors. These include interest rate fluctuations and the state of the border economy etc. For commercial lenders, it is best to use SWOT and Porter’s 5 Forces framework to analyze their competitive advantage and industry trends. 

Quantitative credit analysis uses factors such as employing risk models to assess financial ratios, sensitivity analysis, understanding financial projections, and evaluating physical collateral’s strength and quality for security against credit exposure. 

In addition, commercial credit analysis is done for borrowers seeking business loans where lenders need to define their business entity. The underwriter collects large numbers of qualitative and quantitative data points to analyze risk models and gives a corporate credit rating based on which loan structure is formulated. 

Credit Management Strategy

Having solid credit management strategies can help establish control. However, there are certain steps in creating the strategy.

Define your objectives

First, you need to define your credit management process and the existing practices in your company. You need to ask these questions:

1. Who is responsible for managing credit? Is it managed by a team an individual or other stakeholders? 
2. Is the decision being made sound after analyzing the credit history of prospective customers?
3. What are the rules that customers need to follow in case of late payments? Are they aware of it?

Establish credit and debit management process.

In case your company doesn’t have a standard credit and debt management process you can establish one using these steps:

• Calculate DSO. Your average daily sales outstanding which is the average number of days for your business to collect payment from customers and compare it with industry averages. 
• Reform your billing cycle and payment terms with suppliers.
• Have a healthy diverse customer base so that you are not relying on one big customer.

Formulate a risk management plan.

Ensure that all your employees are familiar with credit risk management practices. It includes contract management optimization, AR collections, identification and analysis of the risk of new prospects and their patterns on defaulting payments, and creating a solid credit risk mitigation plan. 

Every department should be made aware of the mitigation plan and ensure that there is a healthy balance between avoiding risks and seizing opportunities. On the other hand, when you are too cautious you may miss out on some potential sales opportunities. But being too lax can mean you miss noticing signs of risky customers. Therefore, balance is the key to credit risk management. 

Certify prospects

Establishing credit worthiness of your potential customers is of the utmost importance. Your business needs to be proactive in managing credit, especially in understanding the customer’s financial picture. 

Attracting new customers is important for your business but ensure they don’t become a liability. As said earlier, identify their defaulting payment patterns, analyze the risks, and be ready with your credit risk mitigation plan.

Your existing customers should be reviewed periodically to ensure that they don’t default payments and to maintain a good long-lasting relationship. Regularly monitor their cash flow status using information from credit bureaus, banks, and trade references. These can reveal their up-to-date financial activities. 

If there are foreign customers, managing credit can be a bit complex as the credit information might be different and you need to understand their ways to interpret and measure their creditworthiness. Therefore, mention country-specific credit risks while evaluating international clients – exchange rate fluctuations, economic and political instability, trade sanctions, etc. 

Documentation

Establishing contracts with customers is another crucial process for credit management and 

• You need to ensure that it includes all the payment terms and conditions, contract agreements, and other relevant conditions.
• Review with a lawyer before entering the contract.
• Clarify any idiosyncratic policies and payment procedures and be clear on who is handling invoices and who is to be acknowledged with the receipt.
• Ensure that invoices are made early and on time and addressed to the right person and always ask for an acknowledgement receipt for your invoice.
• Document every transaction and every financial discussion with your customers to ensure credibility and it helps reduce the probability of customers defaulting payments. 

Observe your customer’s payment progress.

There is no guarantee that all your customers will make payments on time. However, having a credit management strategy will be beneficial. Continuously monitor your customer’s payment progress and ensure that they comply with the contractual terms. Review each customer’s payment history, match their frequency, align the perceived risks, address them, and mitigate them in advance. 

In the event of delayed payments, don’t immediately seek a lawyer as it is important to maintain good relationships with your customers. Call and give polite reminders but with a firm written reminder that their payment is expected in a reasonable time. If the invoice remains unpaid for several months after consecutive reminders, then turn to professional support.  

Challenges faced with traditional credit management process

Credit management when done manually can be labor-intensive and time-consuming work. 

The credit management team always faces two opposing pressures. One, they are expected to make quick credit decisions to finalize the sales transactions and move to the next customer. 

Second, to make the decision they need to obtain sufficient information and data from the client to make an informed decision and protect their business from bad debts and other financial risks. 

These challenges, however, can be overcome with the help of automation. 

How Does Automation Help?

The challenges of the manual credit management process can be easily overcome using automation. You can accelerate the process using automated technology by automating accounts receivable and collections management. 

Automation improves credit management in terms of:

Precision

A prospect’s creditworthiness needs to be evaluated thoroughly to safeguard from financial risks. The credit analysis process involves analyzing financial information, payment patterns, credit history, and other industry standards. Credits can be offered to customers only if they meet all the eligible criteria and can afford the credit payment in case their business fails. Automation improves attention to detail in the credit analysis process. 

Formulating a clear credit policy

Having an effective credit policy is of significant importance for any business as it clearly defines the terms and outlines any circumstances that need to be considered. A solid credit management policy can keep prospects and employees together, clearly, communicate credit limits, improve customer experience, and define payment terms, interest rates, and penalties for missed or late payments. 

Solid terms and conditions

A robust set of terms and conditions is crucial for protecting both your business and your customers and also supporting the sales contract. The terms and conditions should tell customers about the payment terms and payment streams available to them. It should also outline any contractual protections or rewards – the right to charge late payment interest, discounts on foreclosing or keeping the title to some goods sold on credit, and much more. If this is done well, your customers can clearly understand what is expected of them. 

Regular customer monitoring

Regularly monitoring your customers is essential to identify early signs of inefficiency in paying. Monitoring these specific customers can be done by trend analysis of their payment terms and identifying any changes in their financial circumstances. AI-powered automated tools help with trend analysis and forecast scenarios to get you ready to face any unexpected issues. 

Proactive collection strategies

Implementing collection strategies makes you proactive in facing any potential payment problems. These strategies will help you address the issues well before the due date for payment. Clear collection pathways should be established if payments are not made on time. These can be physical reminders, collection calls, and escalation processes. You need to be certain and clearly communicate to the customer regarding what will happen if they do not comply with the terms and conditions.  

Onboarding 

With automation, you can automate the entire onboarding journey. Collecting the credit information of prospective customers is a tedious process especially when done manually. The process involves gathering bank reference documents, credit bureau reports, and trade references. In addition, credit managers have to simultaneously manage and coordinate the work of different stakeholders. 

When you use an automation system like Cflow, it drastically reduces the onboarding time and simplifies the document collection process. With Cflow, you can customize workflows equip them with collections solutions, and automate accounts receivable to establish control over credit information and optimize the processes. 

AI-powered credit management

AI-powered automated tools help in improving the credit management process by automating invoice tracking, payment reminders, and collection workflows. 

With AI increasingly becoming the hot topic of debate its application has taken many forms from producing business viability scores to predicting a client’s chances of defaulting their payments. 

AI tools and other innovative digital tools can predict a customer’s creditworthiness much faster than human credit managers and much more accurately.

Credit Management Tools

Cflow

Cflow is an AI-powered workflow automation platform that specifically offers automated workflows for credit approvals.

Cflow’s key features for credit management include:

• Automating tasks such as invoice processing and triggering payment reminders.
• Streamline credit approval workflows.
• Monitor risk related to credit based on the transaction history in real-time.
• Improved financial efficiency and reduced manual effort.

HighRadius

HighRadius is an AI-powered comprehensive credit management solution with key features such as:

• Online credit application management.
• Automated credit review and informed decision-making based on financial data analysis.
• Integration with the credit bureau for risk assessment.
• Easy handling of customer disputes with its deductions management functionality.

Tesorio

Tesorio specializes in automated accounts receivable (AR) management and offers the following key features for credit management:

• Easy identification of at-risk payments.
• Automated collection emails and workflows
• Real-time case flow visibility with optimized credit terms.
• Integration with existing accounting systems in businesses for seamless data flow. 

Upflow

Upflow is another AR management solution with impressive credit management features focusing on improving customer experience. Its key features include:

• Self-service customer portal simplifying online payments and invoices.
• Automated payment reminders and follow-ups.
• Easy online payment options enable finance professionals for faster collection.
• Offering data-driven insights for improving credit risk assessment.

TEZ ERP

TEZ ERP is an enterprise resource planning system integrated with credit management functionalities. It offers some valuable features such as:

• Customer credit limit management
• Credit risk analysis based on collected customer information
• Automated invoice generation and collection process
• Easy integration with third-party business applications for holistic credit management

Kolleno

Kolleno offers  cloud-based AR automation solutions with solid credit management functions such as:

• Customizable workflows enabling automated credit control process
• Integration with existing accounting software for centralized data management
• Real-time reporting and dashboards for real-time risk analysis
• Faster resolution of customer inquiries with dispute management tools.

Serrala

Serrala specializes in offering cloud-based B2B credit management solutions and collections management with key features such as:

• Optimized credit application process
• Automated credit scoring and approval workflows
• Risk assessment and monitoring of customer creditworthiness
• Wide range of collaboration features for efficient communication with customers

Versapay

Versapay offers its users with integrated payment solutions and unique credit management functionalities such as:

• Secured online payment portal
• Automated payment processing and reconciliation
• Easy integration with accounting systems for centralized data management and streamlined AR processes
• Customizable payment options for improved customer convenience.

Cogent

Cogent offers businesses a cloud-based platform for credit risk analysis and collections management with some key features such as:

• Integration with the credit bureau for in-depth customer credit analysis
• Customizable workflows enabling automated credit strategies
• Informed data-driven decision-making helps in identifying and mitigating credit risks.
• Risk scoring and segmentation features for targeted credit management

Esker

Esker provides a cloud-based AR automation platform with integrated credit management features such as:

• Automated invoice processing and approval workflows
• Online customer self-service portal for managing invoices and payments.
• Credit risk assessment done using real-time data analytics
• Seamless integration with existing accounting systems for improved efficiency. 

Why Cflow?

Cflow is an AI-powered workflow automation software that specializes in offering unique features for optimizing your credit management. 

Cflow is completely no-code where you can build forms using its drag-and-drop functionality and visualize workflows with its designer dashboard and user-friendly interface. It comes with tons of pre-defined templates for accounts receivable credit information management and more. 

Cflow is flexible, meaning it is scalable to suit your unique business needs. It integrates seamlessly with your existing accounting software for data exchange and centralized data management. 

Conclusion

Credit management is crucial for financial stability and the success of business in the long run. It is essential to establish a solid credit management system with standardized procedures to secure sales, maintain a steady stream of cash flow, and reduce the impact of financial losses from bad debts and delayed payments. 

Automation is the key to optimizing credit management as it helps automate approvals, accounts receivable collections, and contract management and maximize overall effectiveness. Looking for effective ways to optimize your credit management with automation? Try Cflow. Sign up for a free trial and talk to our experts today!

FAQs

What is credit management?

Credit management can be defined as the process of offering credit to prospective customers based on specific eligibility criteria and payment terms and conditions. Their credit history and payment terms are analyzed and ensured that their profile fits their company’s credit policy. 

Why do businesses need credit management?

• Credit management is crucial for businesses:
• It increases the customer base and purchasing activity
• Extending credit increases encourages payment options and attracts new prospects
• Effective credit management improves customer relations, improves trust and builds loyalty
• Help gain a competitive advantage

How does credit management influence business?

Poor credit management hurts business’s revenue streams and causes unnecessary debts. It reduces cash flow and affects customer experience. However, effective credit management can ensure your business grows, collecting payments on time improves customer credit history and helps maintain good relations. Therefore it is essential to have a strong credit policy and a risk mitigation plan.

How does process automation help the credit management process?

Automating credit management with a workflow automation tool like Cflow can streamline tasks, automate approvals, send reminders, and timely follow-ups, reduce operational costs, and improve overall efficiency. 

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