Importance of credit mgt

Importance of credit management

An organisation will not function without giving or receiving credit. But all credit dealings usually involve a certain element of financial risk. Any business undertakings who wants to remain economically sound, and preserve the jobs of the workers, must avoid bad credit risks, especially in time of economic slowdown or recession !.

A credit manager must therefore obtain sufficient background credit information for his decisions to grant credit to his customers. In order to make reasonable judgment on credit-worthiness of a potential customer, he has to bear in mind the importance of the following :-

(i) Profitability of an organization is dependent on the volume of sales and the related profit margins .

(ii) Survival of an organization is dependent on the management’s ability to manage short-term cash flow and long term financial requirements .

(iii) Bad debts may wipe out whatever marginal profits an organization makes especially during an economic slowdown situation.

(iv) Effective credit control and debt collection procedures will ensure accounts due from debtors are converted into cash as soon as they fall due to further expand the organization’s operations.

The above is very real during the time when Malaysia is facing a crisis in foreign exchange movement. The Ringgit has depreciated sharply against all major currencies from July 1997 to February 1998. From a stable benchmark of an average RM2.50 to 1 USD for a long time, the Ringgit has depreciated drastically to almost RM5.00 to 1 USD during the peak of the financial crisis in 1997/98 !

There was panic everywhere and people have been transferring the Ringgit from local banks to foreign owned banks and converting Ringgit to other currencies while some are transmitting out of Malaysia. While the government is planning to borrow funds from cash rich countries, there is a real shortage of cash in the financial system.

This has created an artificial credit squeeze in the economy. When the common people and business entrepreneurs perceive such situation, they have to re-examine their balance sheets. Are they over-exposed to any major customer groups ?, in any particular industry ? for any particular debtor ? and the like. If yes, can they collect their debts in view of the tight credit availability from financial institutions? If no, what must they do to protect themselves to survival this financial turmoil?

The above scenarios make credit management, debt collection and debt prevention even more transparent and important. Organisations who in the past do not have proper credit management and debt prevention policies and procedures most likely will find themselves in a limbo.

But if you are caught in this situation, what best you can do? Are there any appropriate debt collection and prevention strategies to use to minimise potential bad debts so that the organisation can survive?

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