Running a business is tough. There are so many critical aspects that the business owner must get right. Proper management of human resources and product or service offering are on top of the list. Other factors to be considered are regulatory compliance, and stakeholder relationships.
One aspect of stakeholder relationships is credit management. The two parties involved in this are the customers and suppliers. How the business handles them is critical to the success of the company. You will understand how as we explore the topic in more detail.
Understanding Credit Management
Cash flow problems are a significant reason for the failure of many businesses. A staggering 82% of companies contribute to these sad statistics. The reasons behind the lack of working capital are many. These include inefficient management of debtors and late invoices. Debt accumulation from bad debts and stocking issues also have a role.
The most telling sign of cash flow issues is an inability to settle payments on time. It becomes a waiting and hoping game. Yet, there is a workable solution. It comes in the form of establishing a proper credit management system.
A credit management system deals with the proper handling of credit accounts. It takes many different aspects into consideration. These include:
- Risks assessment to determine creditworthiness
- Setting credit limits
- Timely billing and payment collection from customers
- Ensuring prompt payment of suppliers
Without proper credit management, the business will drown in bad debt. That’s not all, the business credit score will also take a plunge.
Impact of Bad Debt on a Business
Let’s summarize the stakeholder relationship this way. The business gets goods on credit from suppliers. The payments will be due in maybe 30, 60, or even 90 days, depending on the agreement.
The company sells goods to some of the customers on credit, with the same payment agreement. Credit management inefficiencies result in customers not paying on the agreed dates. It starts a vicious cycle of debt accumulation which could result in bad debt. A sample ChexSystems report can be found on the following page (Self-Help ChexSystems Removal Kit).
With no money coming in, the company cannot keep up with employee or supplier payments. In such situations, the company has two options. Some will throw in the gauntlet and close shop, while others will declare bankruptcy and hope to fight another day. Either way, it is a sad scenario all around.
Why Credit Management Systems are Necessary
1. Positive Impact on the Business Credit Score
A good credit score is essential because it determines the business’s creditworthiness. A business that cannot keep up with debt repayments is not a good candidate for loan facilities. It is also important to know how to check if you have a CCJ to avoid a negative impact on your credit rating!
Suppliers may also run credit checks. They do it to determine whether the company is worth extending credit facilities to. The credit report looks at past payment patterns and other factors to assign scores. A FICO score of 850 is what most individuals and companies strive for.
So, do you want to know how to get an 850 credit score? Well, start by putting a proper management system in place. It is a great way to never default on payments by ensuring adequate cash flow to the business. Do keep up with monitoring the business credit reports. Any errors or inaccuracies can affect the credit score.
Credit repair companies can take over the job of monitoring the reports. They can pick out any mistakes and correct them on time. Credit repair professionals are also an invaluable resource for handling credit report disputes.
2. Improved Business Cash Flow
Proper credit management is the best way to avoid facing cash flow issues. That means keeping up with payables and receivables. The credit systems will help keep track of incoming and outgoing cash.
Automation of some tasks means zero delays of payments. Take the example of following up on payments. The task of calling and emailing reminders can be arduous and time-consuming. Yet, automating reminders can make the process so much simpler. The alerts go out at specific dates depending on the business cycle.
The same happens with scheduling payments to debtors. A business can lose a lot of money from penalties or interest. Suppliers may impose such on late payments. Also, you should not forget the impact of such on the business credit score.
3. Creating Customer Profiles
It should be pretty obvious that not every customer is creditworthy, but the process of profiling can be difficult and time-consuming. It requires a thorough background check on their abilities to pay debts.
A credit management system will help with creating the relevant profiles. Business owners can weed out those who may be at high risk.
The systems provide connections with credit scores and other indicators of financial risk. They can also adjust specific customer accounts to respond to financial risk. The business can automate an increase in interest or penalties on defaulting customers.
They can also identify customers with high debt levels. It becomes easier to reduce credit risk with such credit management systems.
4. Overview of Company Credit Portfolio
The right credit management system has one critical strength, and that is the use of data. You can create detailed databases on every customer or supplier account. You get an overview of all the credit facilities in or out of the company.
Such information is helpful for bill generation and credit reports. Real-time updates on account activities lets you know the state of the business. It also allows for quick adjustments when the need arises. You can keep a pulse on everything that contributes to the company’s success.
Credit management systems are, without a doubt, critical for the success of a business. They allow for the control of customer and supplier accounts.
A solid system will increase efficiency and streamline activities. The company gets to keep a close watch on incoming and outgoing finances. Customer profiling helps determine which ones are worth extending credit facilities to. The company can better handle debt payment and bad credit with proper cash flows into the business.
Keeping up with payments will have a positive impact on the business’s credit score. Task automation will relieve the teams from manual, repetitive tasks. Databases provide valuable insights to keep a close watch on the business’s health.