Credit management is a huge part of any financial institution. Be it banks or non-banking lending institutions, the process of credit management is important in making sure that the entire process runs smoothly, while the customers, as well as the institutions, fulfil their individual goals and needs.
If you want a career in the financial sector, it is important for you to undertake a Credit management course and also understand how credit management works and also the process behind it. And thus, in today’s article, we will discuss all credit management, let’s get started.
What is Credit Management?
The first and most important aspect to understand is what is credit management. In simple terms, credit management can be understood as the umbrella term for all the financial services related to the cash flow in a business or organization. This cash flow includes both the income that is generated by the company or organization as well as the cash that leaves the organization in the form of payroll, vendor payment and much more.
Every business wants to get paid on time. But sometimes there are certain scenarios which make business extend credit for services and products, thereby making it a risk. The risk involved in extending credit either to a customer or to a company may be either in the form of delayed payment or no pay. Thus credit management can be understood as the process of managing this risk and making sure that businesses get paid.
And this process applies more so to banks and other financial institutions as they are primarily engaged in the business of extending credit and making sure that they are paid back on time.
When you undertake a Credit management course, one of the first aspects you will be taught is the extent to which credit management is applicable even to the smallest businesses around, followed by how the process is executed.
How is Credit Management Executed?
Now that you understand what credit management is let us better understand how the entire process is executed. In most organizations, which work on a credit system, there is a standard procedure and policy in place which is known as the credit management policy. In simple terms, credit management policy can be understood as a document which outlines the steps that need to be taken to manage the risk that is associated with any transaction and also how to practise credit recovery in the best way possible.
The policy ensures that the company gets all their invoices paid fully and on time by the customers while adhering to all the payment terms that have been previously outlined and agreed upon.
A Credit management course will outline for you all the steps you need to take in order to create a standard credit management policy.
If credit management is done effectively, not only does it ensure that the invoices get cleared on time, but also that the overall cash flow of the organization is smooth and effortless.
Importance of Credit Management
Here are some of the most significant reasons as to why credit management is so important in any modern business:
1. The process helps in determining and assessing the customer’s creditworthiness well in advance.
2. It helps infrequently scanning and monitoring customers credit discipline in order to determine if they are sticking to their commitment.
3. It helps in building quality customer relations and fostering better and more fruitful ones in the future.
4. It helps in detecting late payment in advance and thus avoiding it by undertaking a different methodology.
The modern business infrastructure and economy is designed in such a manner that credit needs to be extended and recovered for any business to function smoothly, thus making the importance and significance of credit management even more crucial.
Also Read: What is Credit Risk Assesment