EXTERNAL SERVICES

• credit data
• credit insurance
• factoring
• collection agents
• risk ‘watch’ services
• outsourcing credit staff/shared credit manager.
CREDIT MANAGEMENT AS A PROFESSION

 In the years which have passed since Burt Edwards

compiled the first edition of Credit Management
Handbook in 1976, it could easily be argued that
nothing has really changed or that everything has
changed. The essence of credit and its underlying
trust has not changed. Allowing customers time to
pay for goods or services still carries the risk that
payment will be late, or not made at all.
In addition, credit management is increasingly being
seen as also a customer service and a marketing
function, and therefore sits just as easily with sales as it
does with finance.

The credit manager needs to have a sound

understanding of the basics:
• know the financial ability of customers
• assess how much credit to allow
• process orders quickly
• collect funds on time.
THE FINANCIAL EFFECTS OF CREDIT MANAGEMEN

 The cost of credit;

 Free credit?;
 The effect of credit on profits;
 The effect of credit on liquidity;
 The financing of credit;
 Cash flow;
 Measurement of debtors;
 Cash targets;
 Planning and budgeting debtors
 Summary
THE COST OF CREDIT

Money costs money. That principle has to be the

foundation upon which all credit transactions are based
– that is to say that the granting of credit, though
beneficial for business as a whole, is not without cost,
either to the supplier or to the buyer, or to both.
FREE CREDIT?
It would be easy for anyone to assume that there was such a
thing as free credit. The consumer is assailed from all
angles with ‘tempting’ offers – ‘0% finance’, ‘3 years
interest free’, etc. – and the advertising hype is at every
turn, from cars to hi-fi s, fridges to caravans, cruises to
carpets. Perhaps this influence spills over into trade credit,
where there may linger a perception among some
companies, particularly those which are sales driven, that
credit can be ‘free’.
THE EFFECT OF CREDIT ON PROFITS

Unless a seller has built into his selling price

additional costs for late payment, or is successful in
recovering those costs by way of interest charged,
then any overdue account will affect his profit .
THE EFFECT OF CREDIT ON LIQUIDITY
Liquidity is cash, or cash is liquidity. From either angle, the answer is
the same. Looking at a company’s balance sheet can reveal the
ability of the company to meet commitments as and when they fall
due, or whether all their resources are tied up in fixed items such as
land or buildings. A company rich in fixed assets may still be short
of cash and therefore have difficulty in meeting current obligations.

The cash needed to run a business comes from somewhere, and at its
most basic, there are two contributors:
• owners’ capital and reserves
• borrowing.