Investment in account receivable of any firm depends on how much it sells in credit and how long it takes for collection of receivables. Efficiency of receivable management is judged against its capacity to expand sales and profitability with reasonable investment in receivables. The credit manager is expected to play a significant role for this purpose. The roles of credit manager in receivable management are as follows:
1. Setting Up Credit Standard And Terms
The credit manager has to set up credit standards to grant the credit. Credit standard refers to the minimum criteria for the extension of credit to customers. The credit standards set by the credit manager may vary from firm to firm. It may be loose or tight as per the condition of the firm. The credit manager should set such a standard, which minimizes the bad debt expenses and increases firm's profitability. Having determined the credit standard, the credit manager should also fix the credit terms. The credit terms include, credit period, discount, if any, for early payment and discount period. The length of credit period has significant impact on the cost of investment in accounts receivables. Longer credit period increases both cost of investment in account receivables and bad debt losses. Therefore, the credit manager may offer cash discount to stimulate customers for early payment.
2. Credit Analysis And Evaluation
Another important role to be played by credit manager is to analyze and evaluate very carefully the credit proposals. Any credit proposal involves some sort of risk and profitability. If not analyzed well, a good customer may be misclassified as a poor credit risk customer and a bad customer as a good credit risk customer.
3. Credit Granting Decision
Once creditworthiness of a customer is analyzed and evaluated on the basis of available information, the credit manager should decide upon whether to grant credit or not. This depends on the result obtained from credit evaluation. Credit granting decision involves certain degree of risk. This risk is perhaps the risk of default. When credit is granted the credit manager either receives the payment in some future date or does not receive at all. If customers pay, firm is benefited by the amount equal to difference between sales revenue and cost. If customers do not pay than amount equal to cost of sales will have to be sacrificed, which otherwise would have been eliminated by refusing credit. Considering these profitabilities, the credit manager make credit-granting decision.
4. Controlling Account Receivables
Once credit is granted to customers, the role of credit manager becomes more important and challenging because the risk of default and cost of investment in account receivables begins with credit granting decision. Therefore, the credit manager should monitor and control accounts receivables periodically. Monitoring and controlling of account receivables involves different techniques, such as preparation of aging schedule, collection matrix and schedule of day's sales outstanding. The credit manager, on the basis of these techniques, should look at the receivable positions and compare it with the past position. If any customer is found to be stretching out the payment, the credit manager should make collection efforts through sending letter, telephone calls, emails, personal visit or legal action against default customers.
