Administration of Credit

Administration of Credit refers to the systematic management of credit activities in a business. It starts from granting credit to customers and continues until full payment is received. In India, credit sales are very common, and delayed payments are a regular issue. Proper administration of credit helps increase sales while controlling risk. It ensures a balance between profitability and liquidity. Effective credit administration reduces bad debts, improves cash flow, and strengthens the financial position of the business.

• Formulation of Credit Policy

Credit administration begins with the formulation of a sound credit policy. Credit policy provides guidelines regarding whom to give credit, how much credit to allow, and the time period for payment. It ensures uniformity in credit decisions and avoids confusion among staff. In Indian business conditions, a flexible but controlled credit policy is necessary to face competition while minimizing risk. A clear credit policy forms the foundation of effective credit administration.

• Credit Appraisal or Evaluation

Credit appraisal involves assessing the creditworthiness of customers before granting credit. The firm examines financial position, repayment capacity, past payment record, and market reputation of the customer. Information is collected from financial statements, bank references, trade references, and previous dealings. In India, personal reputation and long-term relationships also influence credit decisions. Proper credit appraisal reduces chances of default and helps in safe extension of credit.

• Fixation of Credit Limits

Credit limit refers to the maximum amount of credit that can be allowed to a customer. It is fixed based on the customer’s financial strength, business volume, and payment history. Fixing proper credit limits prevents over-crediting and reduces financial risk. In Indian businesses, regular revision of credit limits is important because customer performance and market conditions change over time. Well-defined credit limits help in better control of receivables.

• Determination of Credit Terms

Credit terms specify the conditions under which credit is given. These include credit period, cash discount, and penalty for late payment. Clear credit terms reduce disputes and encourage timely payment. In India, cash discounts are commonly used to improve cash inflow. Properly designed credit terms balance customer convenience and business liquidity. Communication of credit terms to customers is an important part of credit administration.

• Maintenance of Credit Records

Proper record keeping is essential for effective administration of credit. Records of credit sales, customer balances, due dates, and payments received must be maintained accurately. These records help management track outstanding amounts and identify overdue accounts. In India, accounting software and digital systems are widely used to maintain credit records. Accurate records ensure transparency and support timely follow-up and decision-making.

• Monitoring and Control of Receivables

Continuous monitoring of receivables is a key function of credit administration. Regular review of customer accounts helps identify slow payers and risky customers. Aging analysis is commonly used to classify receivables based on the period outstanding. This helps the firm focus on overdue accounts and take timely action. Effective monitoring improves cash flow and reduces chances of bad debts.

• Collection of Dues

Collection of dues is an important aspect of credit administration. It involves recovering payments from customers as per agreed terms. Collection methods include reminder letters, phone calls, personal follow-ups, and legal action if required. In India, maintaining customer goodwill during collection is important. A polite but firm approach helps in timely recovery without damaging business relationships. Efficient collection procedures shorten the collection period and improve liquidity.

• Handling of Bad Debts

Despite careful credit management, some debts may become irrecoverable. Credit administration includes identifying doubtful debts and making provisions for them. Writing off bad debts helps present a true financial position. In India, legal recovery of bad debts can be time-consuming, so prevention through proper credit control is preferred. Effective handling of bad debts protects the firm from future financial losses.

• Interdepartmental Coordination

Effective administration of credit requires coordination between sales, finance, and accounts departments. The sales department focuses on increasing sales, while the finance department controls risk and cash flow. Proper coordination ensures sales growth without financial problems. Clear communication of credit policies helps avoid conflicts and improves efficiency in credit administration.

• Use of Technology

Technology plays an important role in modern credit administration. Accounting software, ERP systems, and automated reminders help in record keeping, monitoring, and collection. In India, digital payments and online banking have improved collection efficiency. Technology reduces errors, saves time, and strengthens control over receivables.