The Fundamentals of Credit Management & Control: What is It & How Does it Work

1 April, 2021
3 min read
Brett Johnson, AVP, Global Enablement
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What you'll learn

  • Understanding the basics of credit control management
The Role of Credit Control Policy in Credit Management
Why is it Important to Efficiently Measure Credit Risk?
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What is Credit Risk Management?

B2B credit is a practice in which a supplier sells their goods or products to a buyer on credit. This means the buyer doesn’t have to make an immediate payment for the goods. Credit teams typically grant a purchase on credit after thoroughly assessing the creditworthiness of the customer.

Credit creates a win-win situation for both buyers and suppliers.

  • Buyers do not have the obligation of instant payments; they get to pay after 30 or 45 days (often referred to as the payment term). This is a convenient offer similar to credit card payments where you don’t need to pay immediately for every purchase you make.
  • By supporting sales on credit, suppliers attract more orders or purchases.

The Role of Credit Control Policy in Credit Management

Many suppliers have dedicated credit teams for measuring the credit risk of their customer portfolios. But how will they assess the credit risk? What’s the procedure of credit risk evaluation?

To answer these questions, organizations build a credit control policy that essentially acts as a framework for credit teams. Every organization has their specific credit policy, but overall, a credit policy provides clearly articulated guidelines about:

  • The terms and conditions of supplying goods on credit
  • Customer qualification criteria
  • The dunning process
  • What to do if a customer goes delinquent

A structured credit policy ensures that the credit team uses a standardized method for managing a customer’s credit risk. This leads to consistent credit decisions and eliminating compliance issues because there is an audit trail. Additionally, a credit policy helps to onboard new talent onto the credit team because they can quickly consume the guidelines to start evaluating credit risk.

Why is it Important to Efficiently Measure Credit Risk?

Credit risk management, often considered to be a back-office function, serves an essential purpose. Credit teams help to protect an organization financially as they are vigilant against risk. If they onboard risky customers it might lead to a higher bad debt reserve.

On the other hand, credit teams are expected to work closely with sales to boost revenue growth. In a nutshell, credit teams wear multiple hats by becoming the guardians of cash and co-pilots of revenue growth.

Challenges Encountered while Mitigating Risk

Let’s look at the significant challenges faced by credit teams while evaluating credit risk for their customers.

  • Lack of Visibility into Customer’s Credit Risk
  • Credit risk monitoring techniques involve a lot of communication between ERPs, spreadsheets, and credit reports. As a result of the manual effort involved, credit teams lack end-to-end visibility on their portfolio risk. This means that if the credit risk fluctuates, they won’t be able to track that change.

    Imagine the risk manual credit management imposes on the organization’s bottom line. It is recommended that credit teams evaluate their customers on a real-time basis with automated credit management systems.

  • Orders Released on Sales’ Insistence
  • Whenever an order gets blocked due to insufficient credit balance, the sales team might insist the credit team releases the order to ensure a good customer experience. In such cases, credit teams release the order based on a verbal payment commitment which isn’t always reliable.

    Credit teams can proactively handle blocked orders by leveraging AI capabilities. AI helps credit teams predict upcoming blocked orders to proactively recover a partial payment from the customer before releasing the order

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