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Credit Control and Credit Management

Credit control, also known as credit policy or credit management, refers to a business strategy where companies extend credit to potential customers as a means to stimulate sales of their product or service.

The primary purpose of credit control is to safeguard businesses by managing the risks associated with granting credit. With effective credit control, businesses can augment their sales by enabling customers to pay later or in installments. However, it is crucial to thoroughly evaluate the creditworthiness of customers to avoid potential losses due to non-payment, especially when extending credit to individuals with unfavorable credit histories.

Companies can adopt various credit control policies ranging from restrictive to moderate and liberal based on their risk appetite. A restrictive credit control policy entails low-risk measures, offering credit predominantly to customers with an impressive credit history. On the other hand, a moderate policy represents a balanced approach, assuming a moderate level of risk. A liberal credit control policy is a high-risk strategy that extends credit to a wide range of customers. Companies aiming for market share expansion or operating with high-profit margins often favor liberal policies. If a company holds a monopoly position, a liberal policy can help maintain their dominance. However, if the monopoly faces minimal competition, a more cautious restrictive policy may be adopted.

The essence of credit control lies in four key aspects: credit period, cash discounts, credit standards, and collection policy. The credit period is the timeframe allotted to customers to complete their payment. Cash discounts offer an incentive for customers to pay swiftly by providing a percentage deduction in the sales price. Credit standards determine the financial robustness required for customers to qualify for credit; lower standards could increase sales but also heighten the risk of bad debts. Collection policy outlines the methodology adopted to collect payments from slow or late-paying customers, aiming to maintain a balance between timely collections and preserving customer satisfaction. The administration of credit policies typically falls under the jurisdiction of credit managers or credit committees, with representatives from various departments such as accounting, finance, operations, and sales collaborating to strike a balance between stimulating sales through credit and minimizing bad debt write-offs.