Companies always face many financial challenges, including the challenges of credit management and collection, which are critical to business sustainability and success, as they form an essential part of a company’s financial strategy, but they are quite different in their purpose and function.
Credit management is based on the firm’s understanding of the ability of clients to repay debts and receivables. This process includes assessing credit and granting loans and credit to clients according to specific criteria. Simply put, credit management deals with giving trust to customers and then determining how financial services are provided to them.
On the other hand, collection management comes after this step, which is aimed at raising outstanding funds from clients. It is a process that involves negotiating and communicating with debtor clients and ensuring that their payments are made in the best possible way.
In this article, we will learn the difference between credit management and collection management and how each can contribute to the success of the company in different ways. We will also explore how to implement effective strategies for each and the importance of balancing them to ensure the sustainability of the company’s finances.
Concepts of credit management
Credit management is a concept based on the management of financial relationships between the company and its clients, meaning understanding the ability of clients to repay debts and amounts owed to them. This process involves customer assessment based on certain criteria, such as credit history, income, and personal or institutional financial history.
When the company effectively manages credit, it makes appropriate decisions about granting credit to customers. This includes determining the credit limits of each customer and the terms of payment for these debts. In addition, the Credit Department also includes careful monitoring and follow-up of accounts owed to clients to ensure that they are provided with the necessary support and guidance.
In other words, the concept of credit management is primarily aimed at striking a balance between granting credit to clients to promote sales and ensuring that the company is protected against the risks of unpaid debt. Implementing good credit management strategies can help the company build strong relationships with clients and increase its profits on a sustainable basis.
Credit management strategies
Credit management strategies are a set of methods and procedures aimed at reducing credit risk and improving the quality and efficiency of credit granted to clients. Some common strategies for credit management are:
Establish clear and specific credit policies. Credit policies define the criteria and conditions that clients must meet when requesting or using credit. It includes the determination of the amount of credit allowed, the period of payment, the rate of interest, and penalties in case of delay or default. It helps to clarify expectations and obligations between lenders and borrowers and reduces the chances of disputes.
Customer Creditworthiness Review: A review of clients’ creditworthiness is aimed at assessing clients’ willingness and ability to pay their debts. An audit of creditworthiness includes the collection and analysis of financial and non-financial information about clients, such as financial history, income, expenditures, debt, and personal guarantees. A credit rating review helps to classify clients according to the level of risk, determine the level of credit appropriate to each customer, and control credit terms based on the degree of risk.
Customer payment performance monitoring: This practice aims to monitor customer payment behavior regularly and instantly. These include using an efficient billing system, issuing periodic invoices, sending payment reminders, and maintaining accurate records of all outstanding amounts. Monitoring customer payment performance helps improve collection, increase cash flow, and detect any deviations or debt repayment issues.
Determination of the correct level of credit: This strategy aims to determine an appropriate amount of credit to be granted to each client based on collectability. The level of credit must not exceed the amount that the client can pay on time or be below the limit that meets the client’s needs. This strategy helps balance client demand and maintain an acceptable level of risk.
Ensure safe storage of data and the maintenance of accurate records of credit agreements. This strategy aims to protect clientsfinancial and non-financial information n fr theft, loss, or damage. These include the use of a reliable database management system, the application of strict security procedures, regular backups, and compliance with applicable laws and regulations. This strategy also includes the establishment and management of accurate records of all credit agreements, including credit terms and controls, invoices, bonds, guarantees, and securities. This strategy helps to facilitate the collection and settlement process and avoid any differences or disputes.
Collection management is a process aimed at following up and collecting debts owed by customers or debtors to companies or financial institutions that provide credit products or services. Collection management includes a range of activities and procedures that help to identify and reduce debt risk, increase cash flow, and improve client satisfaction. Some of these activities and actions are:
Determination of outstanding and overdue amounts: This process aims to know the value and number of debts that have not been paid on time and classify them according to the degree of priority and difficulty in collection. This process helps to determine the magnitude of the problem and potential losses and to develop effective plans and strategies for the collection of outstanding payments.
Communication with customers or debtors: This process is aimed at informing customers or debtors of their outstanding debts, reminding them to pay, and negotiating flexible payment plans or satisfactory settlements. This process helps to build good relationships with clients or debtors, encourages them to commit to paying, and avoids any legal disputes or issues.
Use of different means of collection: This process is aimed at using different means of collection depending on the type and size of the debt, the circumstances of the customers or debtors, and applicable laws and regulations. Means of collection include both telephone calls, e-mails, field visits, online collection, hiring of collecting companies, or filing of lawsuits in the event of non-payment. This process helps to increase opportunities to collect from customers or debtors and reduces costs and time taken to collect.
Evaluation of collection results: The objective of this exercise is to assess the results of the collection process in terms of efficiency and effectiveness in the use of resources and methods used and to measure performance indicators such as collection ratio, collection time, and cost of collection. This process helps to identify strengths and weaknesses in the collection process, draw lessons learned, and make recommendations for improvement.
What’s the difference between credit management and collection management?
The difference between credit management and collection management lies in their respective functions and objectives. Here are some of the most important differences:
Credit management is aimed at granting credit to clients and building positive relationships with them through the provision of financial services such as loans, finance, and loan sales.
Collection management aims to raise outstanding funds from debtors with unpaid debts.
Credit management deals with clients granted credit who may become debtors in the future.
Collection management: deals with debtors with unpaid debts.
Credit management includes credit appraisals, credit limits, and control of debtor clients.
Collection management includes communication with and negotiation of debtor clients and follow-up on outstanding debts.
Credit management: The main objective is to increase sales and strengthen the relationship between the company and clients.
Collection management: The main objective is to ensure the effective collection of debts and to maintain the financial liquidity of the company.
Dealing with clients
Credit management: Clients are dealt with positively to give them credit and build trust with them.
Collection management includes dealing with clients who are debtors carefully, and there may be a need for negotiations with them to collect debts.
Credit management occurs before credit is granted.
Collection management occurs after the expiration of the fixed period for payment of the debt or the customer’s late payment.
Impact on profits
Credit management can contribute to increased sales and, thus, increased profits.
Collection management contributes to the realization of accrued proceeds and the reduction of losses.
Understanding the difference between credit management and collection management helps companies implement appropriate strategies for each of these important financial aspects.
So, as we have seen, providing credit to clients is a strategic decision that requires taking into account many important factors. By developing strategies for credit management and collection and understanding the difference between credit management and collection management, companies and institutions can apply clear and effective policies and procedures and make sound decisions on the best possible credit and collection for their clients.
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