Credit management is one of the primary roles, which banks and organizations that deal with sales and marketing undertake on a daily basis. Smart credit managers understand the significance of lending to the right consumers, who have good credit payment records. This essay explains the importance of managing late payments in enhancing the ability of organizations to manage their credit functions and gain a competitive advantage.
Late payments have serious effects on organizations. Some of the effects initiated by late payment include negative effects on the working budget of the organization and increased costs associated with credit collection. In the highly competitive business environment, these losses can lead to a lack of flexibility. As a result, companies may lose their competitive advantage. Apart from losing funds, companies’ image can also be damaged, as the company may be unable to operate properly on other projects due to financial constraints (Sumathi & Saravanavel 2003).
According to Besley and Brigham (2008), credit managers need to know the types of consumers, who can advance credit purchases and the various methods of payments. Some clients are sole traders and undertake their dealings individually (Weil, Schipper & Francis 2014; Brigham & Ehrhardt 2013). Others are partners, limited companies, government bodies, who work collectively as teams. Some customers have unlimited liabilities, while others have limited liabilities.
Burton (2008) elucidates that some of the credit sales that organizations offer to its customers include leasing and hire purchases. In these credit sales, consumers own part of the whole property and pay in installments based on their contractual agreement with the organization (Wells 2004; Musyoki & Kadubo 2012).
Due to the risks associated with late payments and the high chances of defaults from a number of consumers, managers need to exercise due diligence and ascertain clients’ past performance before advancing credits (Nieuwenhuizen, Rossouw & Badenhorst 2008; Chigozie & Okoli 2013). According to Grunert, Thogersen, and Olande (2005), political, environmental, and technological changes are some of the factors that an organization must consider before giving credits to a client.
Credit managers should identify the type of clients that receive credits so that the right collection policy could be employed during credit collection and management of late payments (Kanchu & Kumar 2013; Onaolapo 2012). Bullivant (2010) explains that telephone calls, faxes, emails, and personal visits are methods that an organization can employ in credit collection. Execution of these credit collection methods must be at the right time so that an organization can engage incorrect systems of redress in instances of late payments (Abiola & Olausi 2014; Edwards 2004).
Proper management of the credit function in organizations is crucial for companies as it enables them to remain competitive. The ability to manage credit functions enables the company to have the necessary funds for further development. It also contributes to the creation of a positive image of the company, which is also important for contemporary companies. The development of proper credit management strategies will enable the company to work with more clients and, hence, increase its profit.
References
Abiola, I & Olausi, A 2014, ‘The impact of credit risk management on the commercial banks performance in Nigeria’, International Journal of Management and Sustainability, vol. 3, no. 5, pp. 295-306.
Besley, S & Brigham, F 2008, Essentials of managerial finance, South-Western College Pub, Mason, OH.
Bullivant, G 2010, Credit management, Farnham, London.
Burton, D 2008, Credit and consumer society, Routledge, New York.
Brigham, E & Ehrhardt, M 2013, Financial management: theory and practice, South-Western College Pub, Mason, Ohio.
Chigozie, A & Okoli, B 2013, ‘Credit management and bad debt in Nigeria commercial banks–implication for development’, IOSR Journal of Humanities and Social Science, vol. 12, no. 3, pp. 47-56.
Edwards, B 2004, Credit management handbook, Aldershot, London.
Grunert, K, Thogersen, J & Olande, F 2005, Consumers, policy, and the environment: a tribute to Folke Ölander, Springer Science & Business Media, London.
Kanchu, T & Kumar, M 2013, ‘Risk management in banking sector-an empirical study’, International Journal of Marketing, Financial Services & Management Research, vol. 2, no. 2, pp. 145-153.
Musyoki, D & Kadubo, A 2012, ‘The impact of credit risk management on the financial performance of banks in Kenya for the period 2000 – 2006’, International Journal of Business and Public Management, vol. 2, no. 2, pp. 72-80.
Nieuwenhuizen, C, Rossouw, D & Badenhorst, J 2008, Business management: a contemporary approach, Juta, Cape Town.
Onaolapo, A 2012, ‘Analysis of credit risk management efficiency in Nigeria commercial banking sector’, Far East Journal of Marketing and Management, vol. 2, no. 1, pp. 39-51.
Sumathi, S & Saravanavel, P 2003, Marketing research and consumer behaviour, New Age International, New Delhi.
Weil, L, Schipper, K & Francis, J 2014, Financial accounting: an introduction to concepts, methods, and uses, Cengage Learning, New York.
Wells, R 2004, Global credit management: an executive summary, John Wiley, London.