Introduction to Credit Management PDF

INTRODUCTION TO CREDIT MANAGEMENT  LEARNING OUTCOMES At the end of the lesson, the students will be able to: Recognize the relevance of effective and efficient credit management to the provider and user of credit. Identify the risks associated with lending. Discuss the principles for...

INTRODUCTION TO CREDIT MANAGEMENT  LEARNING OUTCOMES At the end of the lesson, the students will be able to: Recognize the relevance of effective and efficient credit management to the provider and user of credit. Identify the risks associated with lending. Discuss the principles for the management of credit risk.  Explain the functions performed by each person in the credit and collection department. Describe an ideal credit man based on the qualities he must possess. CREDIT MANAGEMENT Credit management is defined as your company’s action plan to guard against late payments or defaults by your customers. An effective credit management plan uses a continuous, proactive process of identifying risks, evaluating their potential for loss, and strategically guarding against the inherent risks of extending credit.  OBJECTIVES OF CREDIT MANAGEMENT Credit management is concerned mainly with using the bank‘s resources both productively and profitably to achieve preferable economic growth. Safeguarding customer risk, settling outstanding balances, and improving cash flow are three key objectives of credit management that are imperative to founding profitable success.  SAFEGUARDING CUSTOMER RISK SETTLEMENT OF OUTSTANDING BALANCES IMPROVING CASH FLOW RISK ASSOCIATED WITH LENDING Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. ESSENTIAL AND BEST PRACTICES IN MANAGING CREDIT RISK KNOW YOUR CUSTOMER ANALYZE NON-FINANCIAL RISKS. UNDERSTAND THE NUMBERS STRUCTURE THE DEAL PRICE THE DEAL PRESENT THE DEAL CLOSE THE DEAL MONITOR THE RELATIONSHIP STRUCTURE AND FUNCTIONS OF CREDIT AND COLLECTION UNIT/DEPARTMENT The credit department is arguably the most unpopular department in a company. The reason is that customers want unlimited credit in order to delay cash payments, while the credit manager must exercise some prudence in only granting credit where invoices are likely to be paid. The result is two types of risk  The risk of granting too much credit to a customer that cannot pay. The risk of denying credit to a customer who can pay.  ORGANIZING CREDIT AND COLLECTION DEPARTMENT The nature of a business and its size will determine the structure and staffing of the credit and collection department. Unlike most other company operations, the credit department tends to remain fairly constant in size and scope of activities during periods of changing business conditions. This is due to increased support needed for full-volume sales in good times and for increasing delinquencies when economic times are difficult. ORGANIZATIONAL STRUCTURE The credit and collection functions may be separately located within different departments. The credit function is essentially issuing short-term loans to customers, which is a financing function, and so it may report to the treasurer or chief financial officer. The collections function is an extension of the billing function, and so is more likely to report to the controller.  CENTRALIZATION VS. DECENTRALIZATION Although there may be variations among companies, the control and administration functions can usually be classified into two types of operations: centralization and decentralization. The question of whether to centralize or decentralize the credit function is faced by companies with geographically and culturally diverse operating units. It remains important as corporations continue to reengineer their business processes to leverage their technology.  In a centralized structure, the credit function is controlled and administered from a principal or central location. In a decentralized structure, the credit function may report to a principal location (headquarters) with credit personnel located at remote offices. THE CREDIT AND COLLECTIONS TEAMS Who works in the credit and collection areas? There is the manager of each function, as well as highly specialized clerical staff. In this section, we describe the job descriptions of the credit manager, credit clerk, collections manager, collector, and skip tracer. We also note the importance of using a probationary period when hiring employees into any of these positions, since this type of work does not appeal to everyone CREDIT MANAGER JOB DESCRIPTION The credit manager position is responsible for the entire credit granting process, including the consistent application of a credit policy, periodic credit reviews of existing customers, and the assessment of the creditworthiness of potential customers, with the goal of optimizing the mix of company sales and the bad debt losses.  The key elements of the credit manager position are as follows, broken down by tasks related to management and to credit operations.  MANAGEMENT TASKS Maintain a department organizational structure sufficient to meet all goals and objectives. Properly motivate the credit staff Measure department performance Provide ongoing training for the credit staff Manage relations with credit reporting agencies Manage relations with credit insurance providers Manage relations with the sales department CREDIT OPERATIONS TASKS Maintain the corporate credit policy Monitor industry trends Recommend changes in the credit policy to senior management Create a credit scoring model Update customer credit files Monitor the credit granting and updating process  Accept or reject credit recommendations forwarded by the credit staff Conduct on-site visits with the largest customers Monitor periodic credit reviews Monitor deductions are taken from payments by customers Monitor the application of late fees to customers Monitor the corporate leasing program CREDIT CLERK DESCRIPTIONS The credit clerk is responsible for not only reviewing credit applications from new customers but also monitoring current customers to see if their credit levels should be re-examined. The key elements of this position are:  Process credit applications from new customers Conduct trade and bank reference checks Establish credit limits based on credit criteria Maintain records of credit reviews and document reasons for credit limits granted Monitor credit usage by existing customers Monitor financial and credit condition of customers Review existing credit limits at regular intervals Provide credit information to third parties upon request COLLECTIONS MANAGER JOB DESCRIPTION The collections manager position is responsible for all collection activities, including all collection interactions with customers and the management of collection agencies and collection attorneys. This manager is also responsible for accumulating information about the reasons for collection problems and passing the information back to the rest of the company for resolution. The position usually reports to the controller  The key elements of the collection manager position are as follows, broken down by tasks related to management and departmental interactions. MANAGEMENT TASKS Maintain a department organizational structure that can meet all goals and objectives Monitor the use of collection techniques Monitor payment deductions taken by customers Properly motivate the collections staff Measure department performance Conduct staff training as needed Review and approve negotiated settlements with customers COLLECTOR JOB DESCRIPTION The collector position is responsible for collecting the maximum amount of overdue funds from customers, which may include a variety of collection techniques, legal claims, and the selective use of outside collection services  Stratify collection activities to maximize cash receipts Issue drumming letters to overdue accounts Use skip tracing techniques to locate customers Contact customers regarding overdue accounts and determine reasons for non-payment Issue payment commitment letters Negotiate the return of unpaid merchandise QUALITIES OF A CREDIT MAN COMPETENCE AND CAPABILITY COMMUNICATION COST-CONSCIOUSNESS CHARACTER CONSTRUCTIVENESS CREATIVITY CONSCIENTIOUSNESS