As Sri Lanka struggles to overcome the economic crisis, many companies find it difficult to recover credit granted to customers due to the loss of market for its products. Credit management, therefore, is an important aspect for organisations to stay afloat in turbulent times.
The Sunday Observer Business asked Sunil De Silva, an expert in credit management and recoveries in the banking sector, about his views on how companies could effectively manage credit and address the crisis situation.
Among other approaches, he said that this would be a good opening for insurance companies to have a debt repayment insurance cover after studying the process carefully. Approaching factoring companies that buy trade credit at a discount and handing over the recovery of credit to debt collectors are other options.
De Silva works as a consultant in the banking sector with 40 years of experience here and abroad.
Excerpts of the interview:
Q: What is credit management?
A: Credit is granted by business organisations to its customers which permits the buyers to pay off their credit after selling the items purchased. Not only trading or manufacturing companies give credit to customers but also financial organisations and hire purchase companies.
Until the amount due is settled in full by the customer, the organisation which extended credit cannot count the sale proceeds into their cash flow. If for any reason the repayment of credit is delayed or defaulted that would be a loss to the organisation which extended credit.
Managing the credit granted in an effective way resulting in a regular cash flow to the organisation can be described as credit management.
Q: What is the role of credit management in a company?
A: Credit is a very important factor in trade. It has become a popular practice in trade and especially under severe competition in the market, allowing a credit period to buyers has become the norm. The companies which do not allow a credit period to retailers find it difficult to sell their items in the market. A majority of companies close down or go bankrupt when they fail to recover their debts. Credit management is very important for survival.
Collection of credit granted on or before the due date affects the smooth functioning of a firm and it strengthens the financial position. A sale is not complete until the company receives sale proceeds in cash. After the sale proceeds are recovered from the creditors, the company can use such cash to pay back their suppliers and for day-to-day operations.
If a company experiences delays in recovering credit, they will have to resort to bank overdrafts to meet working capital requirements. On the other hand, if the company fails to recover the total amount of credit granted, it will be a loss to the company.
Every company must have a strong credit policy regarding credit management. This policy must outline the following: persons responsible for credit management (item wise, region wise, age wise), credit period allowed to each category of clients, discounts allowed to customers for early settlements, actions to be taken for delayed payments and actions for defaults/ recovery procedure. The credit period allowed to buyers ranges from one to three months. In international trade, it can go up to 180 days. All successful companies have a strong credit management team and a mechanism to monitor credit.
To be continued next week