Strategic Credit Management

Credit is simply defined as a means of converting a substantial part of your sales into units of consumption to the benefit of your customers.

Today, credit is undoubtedly the most indispensible tool of business in our economy. With its continued growth, there has come an increasing demand for business systems, processes, and credit risk mitigation strategies to ensure successful credit management.

In this issue of Strategic Credit Management, we will consider the extension of credit as a sales tool during post recession periods.

Easy credit makes it easy to buy. The resistance to purchasing comes when a spirit of caution prevails and is not always broken down merely because it is easy to obtain credit. As the economy picks up steam, it follows naturally that the ease of obtaining credit and the cost of credit will make it easier to satisfy the demand. This is a condition that is prevalent during "boom" periods.

As the recovery period continues, businesspeople become more optimistic. Sales are easier to make, orders are getting larger, and factories are running overtime to fill orders. Under these circumstances, it is natural for manufacturers to add onto their facilities and distributors to expand their warehouse and storage capacity.

At this stage of the growth period, if not sooner, credit inflation is likely to occur. The reasons are logical. The manufacturer, having increased his production facilities, wants to sell his increased out-put. You are urged to increase the size of your orders as you are selling more goods or showing bigger sales in dollar terms since the prices start to inflate. You are also anxious to buy in larger quantities before the prices increase. In fact you may be easily persuaded to buy a 3 month supply.

There is only one barrier to the desires of each - the question of paying for the goods. Even with increased sales, you may not be able to take advantage of early payment discounts for your larger purchase.

At this point, pressure towards lowering credit standards is likely to come from both the manufacturer and your customers. Under this pressure, undue leniency will likely result in the erosion of sound credit policy.

And all of a sudden it's 2008 all over again!

With rising optimism there is always the danger of forgetting the bitter lessons of a recessionary period. It is our experience that credit staff who even suggest such remembrance are likely to be unpopular; however we would suggest that this is your single biggest opportunity to profit from the lessons of experience.

Objective credit management, policies, and processes can help businesses to successfully navigate their way through good times and bad. In times like these, an arms-length credit processing service can help protect you from yourself.