What role does credit management play in working capital?

Credit management plays a crucial role in working capital by controlling and monitoring credit operations to ensure liquidity and profitability.

Working capital, which is the difference between a company's current assets and current liabilities, is a key indicator of a company's short-term financial health and operational efficiency. Credit management is a critical component of this, as it involves the strategies and actions taken by a company to ensure that it extends credit to customers who are likely to pay and that it collects payments in a timely manner.

When a company extends credit to its customers, it is essentially providing them with a short-term loan. This can tie up a significant amount of the company's cash, reducing its available working capital. Therefore, effective credit management is crucial to ensure that the company does not extend too much credit and put its own financial health at risk. This involves assessing the creditworthiness of customers, setting appropriate credit limits and terms, and actively pursuing overdue accounts.

Moreover, credit management also involves managing the company's own credit obligations. This includes ensuring that the company pays its suppliers on time to avoid damaging its credit rating and relationships with suppliers, while also taking advantage of any available discounts or favourable terms.

In essence, credit management can help to optimise a company's working capital by reducing the amount of cash tied up in accounts receivable and ensuring that it meets its own credit obligations. This can improve the company's liquidity, profitability, and overall financial health. Therefore, effective credit management is a key aspect of working capital management.