Question

whst is the influence of credit management on liquidity

Answer 1

Credit Management is one of the important functions of Finance departmenet of any organization. It has a considerable influence on organixation's liquiduty.

Credit Management means managing an organization's credit portfolio by carrying out following activities:

1. Prescribing the conditions on which credit is granted to customers,

2. Keeping track of recovery,

3. Complying with organization's policy set out by the Board or higher management,

4. Reviewing/scrutinizing customers before granting credit to them.

All this activities helps to ensure that:

1. Organization's money is secured,

2. Organization's money is timely recovered as per its projected cash flows,

3. There is less probability of Bad Debts.

Credit Management in turn helps to ensure that an organization's planned cash flows are achieved.

If on the other hand an organization is not following proper credit management practices it will lead to sub-standard accounts receivables. Such receivables may not fructify on the planned dates. This will lead to reduced cash flows and will effect cash positions on future dates. If cash positions are not as per plan then it may lead to liquidity crunch.

Hence, if credit management is practiced diligently it will help an organizaion to mantain its required liquidity.