Credit Management

Importance of Credit Management

• There is hardly any business concern today
which is not engaged in the grant of credit of
one type or another. However, briefly pointed
out, granting credit is one thing and collection
is another.
• Thus, there is a need for a system which will
insure close collaboration between the grant
of credit and its collection.
• While it is true that selling goods and
rendition of services only to customer who
have shown and demonstrated their
willingness and ability to pay on the basis of
their past records would doubtlessly reduce
the incidence of risks, nevertheless, such
policy will eventually result in a reduction in
sales volume and ultimately work adversely
against the interest of the firm.
• On the other hand, precipitous and
indiscriminate granting of credit to all types of
customers, while increasing sales volume,
could undermine a firm and usher its collapse.
• Hence, the need as well as the importance of
a sound and efficient credit management.
The Credit Man in the Business World
• There is now a recognition of the important
contribution of the credit man to the
successful operation of the company. So
important is he that his words generally carry
much weight.
• It is he who makes recommendations based
upon investigations, studies and analyses,
whether credit should be granted or denied.
• Failure on his part to discharge properly the
task and responsibility reposed upon him by
virtue of his position in the company could
adversely affect the business world in general.
• Lack of judicious care in the grant of credit will
not only trigger losses for the business
concern but, at the same time, result in a
diminution of credit to those who are serving
and are actually entitled to it.
• Undue laxity, while increasing the volume of
business, could mean one thing: bad debts
cluttering books of accounts of the company
which are difficult, if not impossible to collect.
• On the other hand, the overzealousness of the
credit man to prevent losses for the company
and thus become overly strict with respect to
the grant of credit could generate the loss of
customers and thus, consequent reduction in
the volume of business.
 Efficiency of the Credit Man in His
Work
• It is exceedingly difficult to lay down specific
criteria for judging the effectiveness of the
credit man in the performance of his task. For
while it may be true that bad debts are held to
the minimum, however, such cannot be a safe
gauge if at the same time it has resulted in
small volume of business.
• Thus, it is necessary, in the case of a retailing
or wholesaling establishments to know how
many orders were refused as well as how
many were accepted.
• It goes without saying that it is far easier to
refuse orders than to select reasonable risks
or to handle doubtful customers in such a
manner that they will be future boosters for
the company.