If you ask me, I'd say that there will always be issues of credit in business. As long as there is business, credit will not cease. So, it's left for the businessman to know how to manage credit such that it doesn't affect his business adversely.
What is Credit?
Credit arises when goods or services sold are not immediately being paid for. We all at one point or the other have bought goods on credit maybe because, we were short of funds at the moment. We should know that the issue of credit has some financial implications both to the seller and the buyer. To the seller, a credit sale means that he has parted with something of cash value without cash payment.
In other words, he has parted with some of his working capital on trust. Note that, the larger the credit sale, the more the working capital squeezed. To the buyer, he is getting more value with a given working capital.
Besides, credit of any description carries with it some elements of risk as it reduces the rate of the buyer's short-term cash outflow. But the benefits of the credit transactions are not as one sided as they seem. The seller has some benefits too. Some if the reasons why a seller would want to grant credit include the following;
In addition, some large buyers are so important to their suppliers that they can afford to demand and receive special concessions. Credits need to be managed because the risk associated with it as well as the squeeze on working capital must be carefully weighed against the benefits of increased sales volumes and relationship marketing. Management must make a formal or informal cost-benefit analysis of credit transactions. That way, a specific credit policy that defines who qualifies for credit, modalities for granting credit, the duration g credit, collection procedure for slow-paying debtors can b established in advance.
The essence of such a policy is to minimize costs and losses associated with credit transactions. Many companies and businesses are aware that the problem of credit management could be considerably reduced if management were to succeed in giving credit to low risk customers only.
On the other hand, a complete absence of doubtful debt might mean that a business has been losing sales by being too cautious in granting credit. Owing to this, in our various businesses, we have to gather and analyze information about potential credit buyers in order to minimize default risk while making sure that we don't lose customer patronage.
Not everyone is entitled to credit in your business and credits should not be granted all the time or in large quantities. Doing so, might tamper with the business capital thereby thwarting business growth.
