As a business owner, you already understand that every successful company is built on the bedrock of financial stability—and it simply doesn’t exist without effective credit management. Credit management ensures healthy cash flow, reduces exposure to write-offs and bad debt, and helps foster strong customer relationships while also strengthening the bottom line. While the benefits of good credit management may seem obvious, the “how” is sometimes daunting. In this article, we explore how your accounting firm may be a valuable resource for your business in helping you implement effective credit management practices.
Understanding credit
At a high level, credit management refers to the strategies, policies, and procedures your business adopts and implements for extending credit to your customers and collecting payment for products or services.
In practice, credit management entails finding the right balance between extending credit terms to your customers to facilitate sales and ensuring that you can collect payments timely to maintain healthy cash flow in your business. Credit management involves:
- Evaluating the creditworthiness of customers to lower the risk of non-payment or delayed payment;
- Establishing credit limits and credit policies, including payment terms and finance charges when applicable; and,
- Monitoring payment behaviors, including tracking outstanding payments and undertaking collections procedures when necessary.
Effective credit management will help your business make more informed business decisions, sustain cash flow in the business, reduce the administrative burden, and lower risk.
The role of a CPA in credit management
Businesses may not consider consulting their accounting firm when looking at their credit management policies and procedures. This could be a significant oversight, especially for small and mid-size businesses. In reality, an accounting firm providing client advisory services can play an important role in creating an effective credit management program for a business. This is especially true if the accounting firm is already providing outsourced accounting or other advisory services for your business.
An accounting firm can support management in creating and implementing a credit management program in the following areas:
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- Establishing credit policies: Your accounting firm can help you do the analysis necessary to determine appropriate credit policies for your business. What terms can you offer that will work for your business? What steps should you take to evaluate credit risk before extending credit? A CPA can work with your business to create or refine credit policies that align with your company’s risk tolerance, cash flow needs, and financial goals.
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- Setting credit limits: Your accounting firm can offer guidance and insight into appropriate credit limits for your business to offer customers based on factors such as your business’s financial stability, industry norms, and average customer spend.
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- Undertaking credit evaluation and risk assessment: This is an area where your accounting firm should be able to help you set up a process that is both effective and efficient. After all, the sooner credit is approved, the sooner you can make a sale. This includes identification of the information required to do a credit evaluation, establishing criteria for evaluating results, and selecting third-party resources (for example D&B) that may be appropriate for your credit evaluation process.
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- Assessing customer financial health: What procedures does a business need to have in place for ongoing monitoring? This aspect of credit management is often the most overlooked. Using their financial analysis tools and acumen, your accounting firm can help you implement procedures to identify any red flags before they become problems that can threaten your business’s cash flow and bottom line.
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- Developing effective collection procedures: This is a critical component of the credit management process. Your business has to get paid. Your accounting firm can help your business more effectively manage outstanding accounts receivable. Implement best practices for collection and establish clear internal processes and timelines for following up on overdue payments. This ensures a structured approach to credit management and lowers the risk of lateness or non-payment.
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- Streamline and automate credit management practices: Talk to your accounting firm about opportunities to leverage technology solutions to streamline credit management, automate tasks, and easily track credit-related activities and data.
Working with a CPA can help to ensure your business has access to expertise, financial analysis tools, compliance support, and strategic guidance to minimize risk and maximize long-term financial health and success.
When you are ready to engage a CPA to work with your business on effective credit management, XPECT can help. XPECT professional services are designed to support the unique and specific needs of small and mid-size businesses. XPECT is focused on helping businesses optimize business strategy, enhance operational effectiveness, and successfully leverage accounting as a strategic tool, so that business leaders can focus on the strategic aspects of growing the business and achieving business goals. Learn more at www.xpectup.com.