Managing credit in turbulent times
As Sri Lanka struggles to overcome the economic crisis, many businesses are struggling to recoup customer credits due to the loss of market for their products. Credit management is therefore an important aspect for organizations to stay afloat in turbulent times.
The Sunday Observer Business asked Sunil De Silva, an expert in credit management and collections in the banking sector, for his views on how businesses could effectively manage credit and deal with the crisis situation.
Among other approaches, he said it would be a good opportunity for insurance companies to have debt repayment insurance coverage after carefully studying the process. Approaching factoring companies that buy trade credit at a discount and outsourcing credit collection to debt collectors are other options.
De Silva works as a consultant in the banking sector with 40 years of experience here and abroad.
Excerpts from the interview:
Q: What is Credit Management?
A: Credit is extended by commercial organizations to its customers, which allows buyers to repay their credit after selling the purchased items. Not only trading or manufacturing companies extend credit to customers, but also financial organizations and hire purchase companies.
Until the amount due is paid in full by the customer, the organization that extended the credit cannot count the sale proceeds in its cash flow. If, for any reason, repayment of the credit is delayed or defaults, it would constitute a loss to the organization that extended the credit.
The effective management of granted credit, which results in a steady flow of cash for the organization, can be termed as credit management.
Q: What is the role of credit management in a company?
A: Credit is a very important factor in trading. It has become common practice in trade and especially in the face of fierce competition in the market, giving a credit period to buyers has become the norm. Businesses that do not give retailers a credit period find it difficult to sell their items in the marketplace. The majority of businesses close or go bankrupt when they fail to collect their debts. Credit management is very important for survival.
The collection of loans granted on or before the due date affects the smooth running of a business and strengthens the financial situation. A sale is not complete until the business has received the cash sale proceeds. Once the proceeds of the sale are recovered from creditors, the business can use this cash to reimburse its suppliers and for day-to-day operations.
If a company experiences delays in collecting credit, it will have to resort to bank overdrafts to meet its working capital needs. On the other hand, if the company fails to recover the full amount of credit granted, it will be a loss for the company.
Every business should have a strong credit policy when it comes to credit management. This policy must describe the following elements: the persons responsible for credit management (by item, by region, by age), the credit period granted to each category of customers, the discounts granted to customers for early payment, the measures to be taken in the event of late payment and the measures for defaults/recovery procedure. The credit period granted to buyers varies from one to three months. In international trade, it can be up to 180 days. All successful businesses have a strong credit management team and a credit monitoring mechanism.
To be continued next week