Debtors and Creditors Management

Proper management of the accounts receivable and accounts payable function of any business is essential to maintaining a healthy cash flow position; ensuring that business operations can continue smoothly; and achieving business growth.

Most businesses have to provide goods and services on credit to their customers in order to maximize sales. The goal therefore is to provide credit to good customers who pay on time, thus minimizing the amount of bad debts incurred by the company. Debtor management therefore involves setting policies to manage how a company extends credit to its customers, and monitoring implementation of these policies. Four main decisions to consider in debtor management are: whether credit should be provided to customers; which specific customers should be given credit; the credit period or trading terms given to customers; and the maximum amount of credit to be given to a customer at any one time.

Creditors/Suppliers provide your business with the goods and services necessary to operate, therefore having a good relationship with your suppliers can be mutually beneficial. Poor management of your accounts payable can lead to reputational damage and suppliers and vendors will avoid working with your company. In addition, the company may be forced to incur late payment interest, which can hurt profits. Creditor management therefore involves maintaining a robust accounts payable process; documenting the agreed terms in a contract signed and held by both parties; negotiating longer credit terms (where possible); and building strong working relationships with suppliers.

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