Business
Managing Credit
Managing credit involves the process of granting credit to customers and ensuring that they pay their debts on time. It is important for businesses to have a credit policy in place to manage credit effectively and minimize the risk of bad debt. Effective credit management can improve cash flow and increase profitability.
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6 Key excerpts on "Managing Credit"
eBook - PDFThe Management of Consumer Credit
Theory and Practice
- S. Finlay(Author)
- 2010(Publication Date)
- Palgrave Macmillan(Publisher)
In order to maximize their return a lender must manage all of these areas effectively. In addition, there is a need for an inte- grated strategy across each of the five phases to ensure consistency and that contradictory action is not taken within different phases. For example, it is generally not a sensible idea to try and promote further credit to customers whose accounts are in debt recovery because they have failed to honour the terms of their existing agree- ment. Therefore, marketing departments need to have know- ledge of customers’ accounts, not just to determine if someone already has the product, but also to see how their accounts are performing. 1.5 The role of credit management A key point to note from Figure 1.1 is that movement between all five phases is driven by consumer behaviours. The customer chooses whether or not to apply for the product. If offered credit they then choose whether or not to accept the terms under which it is offered. If collections action is required, this is because the customer has, for whatever reason, chosen not to pay and so on. In order to move customers into or out of various phases, the activ- ities of the lender are geared towards trying to persuade (or in some cases force) the customer to behave in a certain way. Therefore, it is possible to sum up the framework within which credit management Consumer Credit Management: An Introduction 13 operates, with all of the key activities, processes and systems employed by lenders, focused on the following. 1. Predicting how individuals will behave in future. 2. Undertaking actions in response to these predictions that maximize the organization’s objectives, by attempting to influence (manage) the behaviour of the customer. So, for example, when someone applies for a loan, the lender is interested in identifying whether the person will: A. Repay the credit advanced to them according to the terms of the credit agreement, generating a positive contribution to profits.
eBook - PDFCorporate Financial risk management
A Practical Approach for Emerging Markets
- Scott Stanley(Author)
- 2019(Publication Date)
- Society Publishing(Publisher)
Risk mitigation strategies with immense knowledge of business through PEST and SWOT analysis provide proof to manage the credit risk. Various tips for a good credit manager have been described to handle the issues related to them and in addition to that market imperfections and measures to it have been discussed to eliminate it. 4.1. INTRODUCTION TO CREDIT RISK MANAGE-MENT Lending has been the essential function of banking from the past time, and perfectly assessing creditworthiness of the borrower has been the one and only important method of lending successfully as per the most of the debtor’s report. The analysis method that is required for debt issue differentiates from borrower to borrower. It also differentiates in function of the various types of lending being considered for the debt issuance. For instance, the risks in the banking related to financing the debt for the building of a hotel or solar project, of providing debt secured by assets or a huge overdraft granted for a retail customer would differ considerably with different borrowers. For financing of project, you would look to the funds produced by future cash flows to reimburse the credit, for asset secured loaning, you would take the benefits of an assets, and for an overdraft facility, you would take a look at the way the accounting record has been kept running in the course of recent years. In this chapter using a credit risk management, we will take a look at the appropriate techniques for investigation for lending to organizations, a subject all the more regularly known as ‘corporate credit (Figure 4.1).’ Credit Risk Management and Control 87 Figure 4.1: Credit risk. Source: https://i1.wp.com/www.au-group.com/wordpress/wp-content/up-loads/2016/06/creditrisk.jpg?fit=300%2C194. Estimating and Managing Credit risk, regardless of whether for loans, bonds or subordinate securities, has turned into a key issue for money related institutions.
eBook - PDFThe Management of Consumer Credit
Theory and Practice
- S. Finlay(Author)
- 2008(Publication Date)
- Palgrave Macmillan(Publisher)
Therefore, marketing departments need to have knowledge of customers’ accounts, not just to determine if someone already has the product, but also to see how their account is performing. 1.6 The role of credit management A key point to note from Figure 1.1 is that movement between all five phases is driven by consumer behaviours. The customer chooses whether or not to apply for the product. If offered credit they then choose whether or not to accept the terms under which it is offered. If collections action is required, this is because the customer has, for what ever reason, chosen not to pay and so on. In order to move customers into or out of various phases, the activities of the lender are geared towards trying to persuade (or in some cases force) the customer to behave in a certain way. Therefore, it is possible to sum up the framework within which credit management oper- ates, with all of the key activities, processes and systems employed by lenders, focused on the following. 1. Predicting how individuals will behave in future. 2. Undertaking actions in response to these predictions that maximize the organization’s objectives, by attempting to influence (manage) the behaviour of the customer. 12 The Management of Consumer Credit So, for example, when someone applies for a loan, the lender is interested in identifying whether the person will: A. Repay the credit advanced to them according to the terms of the credit agreement, generating a positive contribution to profits. or: B. Default on the agreement, leading to a negative contribution to profits. The lender will acquire information about the applicant from a variety of sources, such as the application form completed by the applicant and a credit report supplied by a credit reference agency. This information will then be used to predict the likelihood of behaviour A or behaviour B occur- ring.
eBook - PDF- S. Finlay(Author)
- 2005(Publication Date)
- Palgrave Macmillan(Publisher)
142 7 Credit Management Credit management is about the practical day-to-day activities required to run a modern consumer credit business. In this chapter the activities of the different business functions responsible for credit management, and the systems and processes they employ to manage the customer relationship are introduced within the context of the credit lifecycle. The credit lifecycle represents the different stages in the life of a credit product, as shown in Figure 7.1. Some contact usually occurs between an individual and a lender prior to a credit agreement being entered into – via promotional activ- ity or an enquiry from the individual – but the relationship proper only begins at the recruitment phase when a lender receives a credit application, decides to accept it, and a credit agreement is signed by the customer. The lender will then create some form of account record to maintain details of the current and historical status of the agree- ment and this will be used as the basis of the account management phase of the lifecycle as repayments are made, further credit advanced and other products and services are marketed to the customer. For some small and sub-prime lenders account records may be paper-based, but for all major credit granting institutions account records will be maintained within some sort of computerized system. If a customer breaches the terms of the agreement, causing their account to becoming delinquent, collections action will be taken in an attempt to nurse the account back to a healthy up-to-date status. If this fails, the account enters debt recovery, where the objective is to recover as much of the outstanding debt as possible before terminating the agreement. The life of a credit product ends in one of two ways. Either the agree- ment ends naturally when all outstanding debt has been repaid and S. Finlay, Consumer Credit Fundamentals © Steven Finlay 2005
eBook - PDFGlobal Credit Management
An Executive Summary
- Ron Wells(Author)
- 2004(Publication Date)
- Wiley(Publisher)
Developing credit policy . Setting credit terms . Managing trade finance bank relationships . Managing receivables service providers . Working capital management Outsourcing to this extent brings a different emphasis to the job, shifting the focus from ‘‘the micro-management of individual receivables’’ to ‘‘the macro-management of the receivables portfolio’’. 8.3 OUTSOURCING ORDER-TO-CASH Credit management functions – although often managed in a separate unit – are in fact an integral part of the order-to-cash process 2 of most companies. An ‘‘outsourcing partner’’ or ‘‘managed services provider’’ with a well-structured mandate can integrate the whole process, even across the boundaries of entrenched functional silos. Out- sourcing adds to this the transformation in employees’ attitudes that accompanies a move from working in a ‘‘cost creating support role’’ to providing ‘‘value adding services’’ in an enterprise that seeks to maximize its share of savings generated, while improving the customer experience provided. The results achieved through this approach have been significant. One ‘‘managed services provider’’ that works with Global 1000 companies has reported that it has reduced working capital requirements 82 Global Credit Management 1 Lists from The Credit and Financial Management Review (1997: 16). A report created by the Credit Research Foundation (http://www.crfonline.org) based on extensive focus groups and a survey conducted in the USA, during 1996/97.
eBook - PDF- S. Finlay(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
9 Credit Management Credit management is about the day-to-day activities required to run a modern consumer credit business. In this chapter the activities of the different business functions responsible for credit management, and the systems and processes they employ to manage customer relation- ships, are introduced within the context of the credit lifecycle. The credit lifecycle represents the different stages in the life of a credit product, as shown in Figure 9.1. Some contact usually occurs between an individual and a lender prior to a credit agreement being entered into – via promotional activ- ity or an enquiry from the individual. However, the relationship proper only begins at the recruitment phase, when a lender receives a credit application, decides to accept it, and a credit agreement is signed by the customer. The lender then creates some form of account record to hold information about the current and historic status of the agree- ment. The account record will be used as the basis of the account man- agement phase of the lifecycle as repayments are made, further credit advanced and other products and services are marketed to the cus- tomer. For some small lenders account records may be paper based, but for all major credit granting institutions account records will be main- tained within some sort of computerized system. If a customer breaches the terms of the agreement, causing their account to becoming delinquent, collections action will be taken in an attempt to nurse the account back to a healthy up-to-date status. If this fails, the account enters debt recovery, where the objective is to recover as much of the outstanding debt as possible before terminating the agreement. The life of a credit product ends in one of two ways. Either the agree- ment ends naturally when all outstanding debt has been repaid and the account is closed, or if collections and debt recovery action fail to 191
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