Credit Management
Credit management covers assessing customer creditworthiness, setting credit limits and terms, monitoring receivables and collecting overdue debts. Learn the tools: credit reference agencies, trade references, bank references, financial statement analysis (liquidity, gearing, profitability), and credit scoring. Set credit limits and terms aligned with risk.
Monitor receivables using the receivables collection period, ageing analysis, and ratios. Collection techniques escalate: reminder, statement, telephone contact, final demand, debt collection agency, legal action, and writing off as bad debt. Understand early settlement discounts, interest on overdue accounts and the cost of offering credit.
Traps: confusing receivables days with payables days; forgetting that a discount reduces both cash received and profit; ignoring the cost of financing receivables; failing to distinguish a bad debt from a doubtful debt provision; overlooking that a factor may offer recourse or non-recourse arrangements.
Rule of thumb: receivables days = (trade receivables ÷ credit sales) × 365. Worked example: receivables £60,000, credit sales £480,000. Days = (60,000 ÷ 480,000) × 365 ≈ 45.6 days. Compare with the stated credit term of 30 days to identify slow payers and target collection effort.