Effective credit policy
If your business does not improve, it will certainly deteriorate.
Continuous improvement process means
that you constantly find ways
how to do your business better, faster and not
as competitors do.
And then you can become an effective leader.
Why is there a need for an effective credit policy?
Due to the high level of competition in the market, the situation is such that in order to increase the attractiveness of its products (finished products, goods, works, services), enterprises are forced to lend to wholesale operators (distributors), and those, in turn, retailers and their networks. As a result, a significant part of the current assets of an enterprise is always concentrated in accounts receivable for works, goods, services, which puts an enterprise’s ability to generate profits depending on the quality of receivables management.
Enterprises have to increase accounts receivable by selling products on credit in order to achieve their highest economic goals, which can be expressed using the absolute financial performance indicator “Net Profit” and relative performance indicators – ROCE, ROTA, ROE, ROI. All indicators characterize the efficiency of the enterprise, which is expressed in the fact that the enterprise “does the right thing,” i.e. produces and sells its products with the generation of net profit, positive net cash flow and an increase in its market value.
Consequently, lending to product buyers, on the one hand, leads to an increase in revenue from product sales and gross profit, and on the other, to an increase in the company’s costs associated with attracting short-term bank loans and the occurrence of overdue, doubtful and bad accounts receivable. In this situation, it is necessary to act in accordance with the highest economic goals of the enterprise, which raises the question of the effective management of receivables and the introduction of effective commercial lending technology for product buyers.
The enterprise’s credit policy is understood as a management tool to achieve the highest economic goals of an enterprise related to net profit, positive net cash flow, market value of an enterprise, and return on capital with liquidity and financial sustainability constraints, through the achievement of current goals for sales of credit products, gross profits from sales on credit and costs associated with commercial lending.The credit policy of the company, ensuring the achievement of the objectives of the proceeds from the sale of products on credit and maximizing the profit associated with the commercial lending of product buyers, is called the effective credit policy of the company.
If the achievement of the company’s objectives in terms of proceeds from the sale of products on credit is related to the effectiveness of the effective credit policy, then the achievement of the goals on net profit, positive net cash flow, market value of the enterprise and return on capital should be linked to the efficiency and effectiveness of the credit policy. A quantitative criterion for the effectiveness of credit policy is to maximize the profits from investing the capital of an enterprise in receivables for goods, works, services.
Intuitive credit policy by practical tyke.
As a rule, trade managers, general directors, and managers of business owners lack a systematic approach that clearly describes the priorities between the various factors that they can manage to achieve the highest economic goals of an enterprise. Obviously, much depends on the ability of products to meet the significant needs of customers, on the level of prices, on the competence of personnel, on the quality of the distribution system, on advertising support, on the literacy of building business processes. But, unfortunately, the idea of what to pay attention in the first place, why, and what can be expected at the same time, is lacking in most managers.
Managers have a need for competent system approaches to company management. One of them is the implementation of an effective credit policy that will help minimize overdue, doubtful and bad debts, ensure the required turnover rate of receivables, and achieve the target for revenue from sales of products and net profit.
The fact that today the need to improve efficiency, in streamlining the credit policy exists in almost many enterprises, is beyond doubt. At the same time, not all managers know what needs to be done to transform the crediting of product buyers into an economic activity that generates optimally increased profits.