You can’t overstate the importance of building healthy supplier relationships; they influence everything from product quality to overall efficiency. That’s why establishing and maintaining beneficial supplier relationships can significantly impact your company's success and longevity.
There’s one powerful method to guarantee strong supplier relationships: maintaining a healthy credit management system. It will deliver the financial stability, trust, open communication, negotiation power, and flexibility required for stable supplier relations.
During the COVID-19 pandemic, there was a significant breakdown between businesses and their suppliers. Despite that, many companies operated smart credit management systems to push through these challenging times.
In this article, we’ll look at the role of credit management and its impact on developing strong and mutually beneficial relationships with domestic and international suppliers.
The role of credit management in business
Credit management is the strategy used by businesses to assess and control credit risks. It assesses the creditworthiness of customers and manages credit terms to stop financial strains caused by poor credit control.
The primary goal is to balance extending credit to customers while safeguarding the company's financial stability.
Unfortunately, there are many downsides to having a poor credit management system:
- Supplier issues: A major downside of weak credit management is a breakdown in relations with your suppliers, which is potentially hugely damaging for your company.
- Cash flow problems: A bad credit management system often causes cash flow problems, one of the main reasons your company may fail. Poor cash flow causes no funds for operational expenses and critical investments.
- Bad debt expenses: Weak credit management causes an accumulation of bad debts, straining your company's ability to invest in marketing, research and development, and employee well-being. Worse still, this can lead to immense emotional and mental strain.
- Poor credit rating: The last thing your company needs is a bad credit rating. It makes it challenging to secure finance terms, build strategic partnerships, and attract investors.
- Reduced borrowing opportunities: Lenders often become hesitant to offer credit facilities if your company has poorly managed its credit.
You can avoid these issues with a strong credit management system. Nonetheless, it’s important to assess your current system and make fast adjustments now.
The benefits of smart credit management for suppliers
1. Opening new sales channels
Having a smart credit management strategy is a proven path to opening new sales channels and bolstering trust with current or new suppliers.
Remember, if your suppliers have confidence in your company's credit management systems—they are more likely to develop favorable terms and collaborate on innovative projects.
In addition, you’ll have a broader scope for new projects and an improved chance of growing your business.
2. Building a healthy cash flow
Strict credit checks are essential for maintaining a healthy cash flow, and companies that struggle with credit checks find themselves in financial trouble.
That said, if you set clear credit limits and terms, your company can prevent overextension and reduce the likelihood of late payments; this guarantees a steady influx of cash to support ongoing operations.
3. Increased negotiation power
You must develop as much negotiation power as possible when dealing with suppliers. You’re dealing with expert negotiators, so you’ll struggle to achieve a good deal if you don’t have some leverage.
However, one of the best ways to build power is by proving financial stability and reliability. Suppliers are typically inclined to offer discounts, exclusive deals, and favorable terms if they trust your credit management.
4. Payment flexibility
Flexibility is always a significant advantage when dealing with suppliers. Thankfully, suppliers are more likely to offer flexible payment terms if you have a robust credit management system.
In addition, finding extended payment terms and phased payments is far more variable when you have a strong credit management foundation.
5. The attraction of high-quality suppliers
Regardless of the industry, your company will always want to work with high-quality suppliers; these suppliers are far more likely to invest in your company’s success.
Furthermore, high-quality suppliers are more trustworthy, which helps to safeguard your business from any financial woes.
Some industries, such as construction, are highly reliant on suppliers to meet deadlines; that’s why high-quality suppliers are imperative.
6. Fewer financial risks
Sufficient credit management helps reduce the financial risks associated with supplier relationships. Your company can create an atmosphere of trust and reliability by ensuring transparent credit terms, timely payments, and adherence to agreements.
In turn, this minimizes exposure to financial uncertainties and protects the business from disruptions and losses.
Improving supplier relationships through credit management
Building and nurturing mutually beneficial relationships with suppliers is imperative for your business. If you have a solid credit management system—with efficient and transparent finances—you’ll improve your relations. Here’s how:
1. Build trust
Creating trust always comes first when dealing with your suppliers. That said, your credit management goes a long way to building trust through flexible payment options and transparent credit terms.
When suppliers trust your business due to excellent credit management, they are more likely to prioritize and invest in the success of your business.
2. Communicate and set goals
Open and transparent communication is pivotal in any relationship, and supplier relationships are no exception. Therefore, clearly articulating expectations, goals, and challenges ensures you’re on the same page.
Setting realistic goals promotes a sense of collaboration and partnership, strengthening the foundation of the supplier relationship. However, ensure you communicate your credit management goals, especially when your partnership begins.
3. Offer reliable payments and understand supplier challenges
Building trust involves more than just communication: it requires trustworthy actions. That’s why timely and consistent payment practices through successful credit management demonstrate a commitment to the partnership.
Likewise, understanding and empathizing with supplier challenges further solidify the relationship. This understanding creates an atmosphere where both parties work together to overcome obstacles.
4. Offer performance-based incentives
Although this largely depends on the size of your company, offering performance incentives is an excellent way to improve the relationships with suppliers. For instance, you can set key performance indicators (KPIs) and objectives.
These incentives motivate suppliers to exceed expectations and contribute positively to the success of your business. However, you’ll need a healthy credit management system to ensure your finances are in order before offering incentives.
5. Utilize joint business planning and risk-mitigation
Transparent credit terms and reliable payment practices are essential for joint business planning with your supplier. Credit management systems with clear communication on credit terms massively help with joint business planning.
You’ll also need to mitigate risk when joint business planning with your supplier. However, solid credit management helps detect financial challenges before they arise, allowing you to plan for unforeseen circumstances.
Leveraging technology in credit management
Technology plays a massive role in improving your credit management processes. Credit management software streamlines operations and enhances vendor relationship management, leaving your business with considerably better procedures.
Here are some ways technology can improve your credit management:
1. Standardizing agreements and automating routine tasks
Managing supplier relationships becomes increasingly complicated as your company scales. As a result, it’s essential to streamline your processes by standardizing your agreements and automating routine tasks with software.
This saves time and reduces the likelihood of errors, ensuring a seamless and efficient credit management system.
Here are some routine tasks you should automate with credit management software:
- Credit scoring systems: Automated credit scoring systems use advanced algorithms to evaluate a customer's creditworthiness. These systems analyze diverse data points—including payment history, financial ratios, and industry benchmarks. You can make more objective credit decisions by automating these tasks, reducing the risk of human error and bias.
- Credit monitoring software: Credit monitoring software enables real-time tracking of your customer’s credit statuses. If you continuously monitor changes in credit scores and financial stability, you can identify any warning signs of potential credit risks. This proactive approach allows for timely adjustments and minimizes the impact of unforeseen financial challenges.
- Electronic invoicing and billing: Electronic invoicing and billing systems streamline the invoicing process by automating the generation, delivery, and tracking of invoices. As such, this reduces the time and resources spent on manual invoicing, minimizes errors, and accelerates the payment cycle.
- Payment Reminders and Follow-ups: You should automate the scheduling and sending of payment reminders to customers. Create a system that triggers reminders for upcoming or overdue payments. Automated follow-up emails can be tailored based on predefined criteria, helping to maintain consistent and timely communication regarding payment obligations.
2. Ongoing assessment and improvement
The business landscape is dynamic, and adequate credit management requires ongoing assessment and adaptation.
Therefore, continuous evaluation of supplier relationships and feedback mechanisms are essential components of a proactive credit management strategy.
Here are some important things to continually assess with the help of technology:
- Credit metrics: Your business should implement a system for continuous monitoring of key credit metrics. Review factors like Days Sales Outstanding (DSO), ageing of accounts receivable, and credit utilization ratios by using technology.
- Regular credit reviews: Conduct regular and systematic credit reviews for existing customers. You can set predefined intervals for reviewing credit terms, credit limits, and overall creditworthiness with the help of software.
- Feedback from suppliers: You should create mechanisms to gather feedback from suppliers regarding credit management processes. Suppliers often have valuable insights into the efficiency of payment processes and the overall credit relationship.
- Scenario analysis: You should also conduct scenario analysis and stress testing to assess the resilience of credit management strategies under different economic scenarios. You can use software to help predict different scenarios.
3. Adapting to changing market conditions
Market conditions are subject to change, and your supplier needs may evolve. That’s why your company must be agile and adaptive in its credit management strategies with the help of technology.
For instance, your business can adjust its credit management approaches by staying informed about industry trends, economic shifts, and supplier dynamics. During the COVID-19 pandemic, for example, companies had to use technology to rapidly adjust to supply chain issues.
In addition, you should always analyze customer payment behavior trends to identify patterns or deviations. You can use software to notice changes in payment cycles, frequency of late payments, and any emerging trends in customer payment behavior.
Final Thoughts
The strategic management of supplier relationships through effective credit management is integral to the long-term success and growth of your company. The benefits of smart credit management—from better cash flow to opening new sales channels—show its significance in helping you through the modern-day business world.
Better still, you can fortify your company's foundations, develop innovation, and head toward financial success by prioritizing supplier relationships and embracing smart credit management.
For more information on improving your credit management system, check out our blog posts and resources at Chaser.
To know more about how Chaser can automate and streamline your credit control processes, request a demo today or start your no-obligation 14-day free trial today!
