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BUSINESS NOTES ON CREDIT MANAGEMENT THEORY AND
PRACTICE
This business note focuses on credit management in theory and practice.
In these research notes, we are provided with information on the effect
of late payment on corporate performance, further accentuated by
COVID19. Covid-19 has had a profound impact on the global economy,
and it is still unclear what the long-term ramifications will be. In light of
this uncertain future, it is more important than ever for students to learn
about credit management.
These notes will help students acquire skills related to credit
management in both theory and practice. It provides them with insight
on how to adjust and adapt to changes as a result of unprecedented
changes in business. It will also help them to learn how to mitigate the
negative effects of credit management that come with the change in an
organization. This will help them to understand how to use credit
responsibly and how to protect their financial wellbeing in the event of
economic hardship. By learning about credit management, students will
be able to make sound financial decisions that will benefit them in the
short and long term. Therefore, it is clear that notes on credit
management during covid-19 will be immensely helpful for students.
Credit management: Theory and Practice This report examines the effect of late payment on corporate performance, further accentuated by COVID19. Due to the ravages of Covid-19, many organizations have suffered losses that have made them unable to cover their credit dues. As such, a record of late payment to the Credit Community has been observed. This is a risk to the creditworthiness of an organization, which may reduce the Credit Community's trust and lead to fewer credit allocations and even credit cuts. The cash inflow was affected since the covid-19 pandemic caused a stir in the business processes. The company was left with less cash to maintain its operations as well as cover its payments to the credit community. Late payments affect the company's credit score, which means that the credit community will reconsider crediting the organization in terms of need. This may negatively affect the organization's performance. On the other hand, timely payment with the available finances may also bring the organization's performance to a standstill. For example, the pandemic disrupted the business process in our organization. As the credit manager, you need to evaluate the company's financial situation and weigh the available options. As a result of the pandemic, credit communities have put measures to accommodate late or reduced payments from organizations (Pike and Cheng, 2001, 1013). Therefore, the credit manager can use this opportunity to ensure that the credit payment is made without affecting the organization's performance significantly. In order to deal with future uncertainties such as the covid-19 situation, the credit manager needs to set out credit coverage alternatives with the credit community before taking the loan. This will cover future uncertainties (Peel et al., 2000, 13). To address future uncertainties relating to credit repayment, the organization can seek insurance cover from Commercial Credit
by reducing credit lines), risk diversification (through a mix of sectors or maintaining granularity while avoiding cluster risks), risk compensation (by accepting/increasing loan collateral, credit default swaps), risk avoidance (through credit trading) or avoiding the risk of default by preventing payment arrears. These measures will serve to prevent or minimize a profit-reducing loss of receivables and deal with associated problems (Chong, 2010, 149). Credit management should include all risk management measures for risk reduction and risk avoidance. SECTION B: Question Two i) ways of effective debt management in times of economic crisis, such as recessions, pandemics, and political instability 25 marks According to Paul and Boden (2014), credit management is critical during times of uncertainty. During such times, the role of a credit manager becomes vital to the survival of institutions, especially Small and Medium Enterprises (SMEs) that tend to have limited borrowing power. The following ways can help ensure effective debt management in times of uncertainties; Credit insurance Credit insurance is a form of insurance that protects the borrower from sudden default. If an event occurs for which he is not responsible and prevents him from paying further installments, the loan is still secured by a previous credit guarantee. Such events can be death, disability, or general unemployment (Jones, 2010, 45). Credit security is an additional security guarantee meant to safeguard the organization from the risk of loan default in case of uncertainty.
Credit insurance also increases the chance of getting a loan - after all, this reduces the risk for the lender that, if the worst comes to the worst, payment will not be made. This can be the solution for financing, especially for older people who rarely get loans on attractive terms due to the higher risk of illness. Credit insurance guarantees the repayment of a loan if the organization is no longer able to pay. Risk assessment This involves evaluating the possible risks related to a loan before taking it. The management of credit risks is just as important for the sustainability and development of a company as generating sales. And although large companies are most likely to hire a credit manager, this position is also of strategic importance for SMEs because they are much more sensitive to the effects of an uncertain cash flow. Proper credit management practices The primary goal of credit management is to create transparency and manage the risks involved in credit acquisition and payment. The avoidance of a negative credit score and the limitation of potential damage serves to secure the existence and improve a company's earnings and liquidity situation. Therefore, proper credit management is a responsible position that bridges the gap between these two entities. ii) whether using credit insurance as a credit management tool helps improve the credit management function, or whether it is just an extra cost that makes granting credit more costly and that can even lead to 'lazy' credit management Credit insurance is a credit management tool that helps improve the credit management function in that it accounts for future uncertainties that can bring down the organization. Credit insurance takes a large burden off the shoulders of the borrowing organization (Li et al., 2016,
References Boden, R., and Paul, S. Y. 2014. Creditable behavior? The intra-firm management of trade credit. Qualitative Research in Accounting & Management. Paul, S., and Boden, R. 2014. Trade credit: A literature review. British Business Bank , 12 , 1-39. Jus, M. 2013. Credit insurance. Academic Press. Jones, P. M. (2010). Trade credit insurance. Li, Y., Zhen, X. and Cai, X., 2016. Trade credit insurance, capital constraint, and the behavior of manufacturers and banks. Annals of Operations Research , 240 (2), pp.395-414. Edwards, B. ed., 2004. Credit management handbook. Gower Publishing, Ltd. Pike, R. and Cheng, N.S., 2001. Credit management: an examination of policy choices, practices and late payment in UK companies. Journal of Business Finance & Accounting , 28 (7‐8), pp.1013-1042. Peel, M.J., Wilson, N. and Howorth, C., 2000. Late payment and credit management in the small firm sector: some empirical evidence. International small business journal , 18 (2), pp.17-
Chong, F., 2010. Evaluating the credit management of micro-enterprises. WSEAS transactions on Business and Economics , 2 (7), pp.149-159.
