How Does a Credit Manager Affect Collections?

Posted by Ryan Howard on Aug 9, 2018 4:57:12 PM

Credit Manager Definition-1

Within your accounting department, there are responsibilities that can help or hamper your business' bottom line. Today we'll examine a relationship that is closely tied and could be the answer to negative cash flow. While your sales team greatly affects operations, it's the collections of those accounts that really determines the success of your business. When your accounts receivable team is not able to collect and are consistently writing off bad debt, it may be time to turn to your credit manager for answers.

A credit manager's job can affect collections and it's important to understand how.

What Does a Credit Manager Do?

To keep accounts receivable management as effective and efficient as possible, responsibilities are divided and conquered. A credit manager will review the credit worthiness of clients to determine and manage risk for your organization. Some of the other responsibilities of a credit manager include:

  • Creating a credit policy
  • Reviewing creditworthiness
  • Underwriting credit applications
  • Setting payment terms

A credit policy is a good standard for the business to follow when determining which clients are worth the risk of financing. 

What is a Credit Policy?

Having a documented credit policy will determine how your business extends credit and how that credit is managed. While helping to ensure the policy is consistent, the credit manager will also reexamine the credit policy regularly to continue to improve efficiency in accounts receivable.  The policy may be written with the following in mind:

  • the mission of the organization
  • percentage of bad debt to sales
  • procedure for evaluating credit risk
  • payment terms depending on credit risk or worthiness

See also: 5 Reasons for Accounts Receivable and Collections Policies

How Does the Credit Manager Affect Collections?

A credit manager will examine financial reports such as aging and days sales outstanding, as well as the percentage of bad debt write offs to establish the effectiveness of collections.  If it is determined that far too many accounts are uncollectible, the credit manager has the responsibility to adjust the credit policy to reduce accounts receivable and bad debt. If the credit policy is too relaxed, that means that more clients are being trusted when they clearly have a history of late or non-payments. 

The credit manager may also establish collections policies and guidelines for collecting on past due invoices. If clients are disputing invoices, credit managers may also help to resolve the challenges so that payments can be made. 

How-To Guide: Collect Past-Due Customer Payments

The responsibilities of a credit manager can greatly affect the cash flow challenges of businesses. Understanding the relationships in accounting and your financial statements can help narrow down weak links and the reasons behind negative cash flow. Consider setting goals and evaluating metrics to create consistent success.

Topics: Best Practices, Accounts Receivable, Commercial Debt Collection