How to manage credit risk

Lisboa, Inês; Miguel, Joana

http://hdl.handle.net/10400.8/9012

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Authors

Lisboa, Inês

Miguel, Joana

Abstract(s)

Purpose: Managing credit risk is crucial for a company’s solvency. Most of the company’s receivables are in credit. Prompt payments are almost insignificant, and the delay of turnover payments has become a tendency, especially with the 2007/2008 financial crisis. Therefore, companies must know how to set individual credit to customers, how to protect from non-payments, how to act timely and how to minimize indebtedness. This paper aims to highlight answers to all these questions. Methodology: This paper deals with the theoretical exposition of credit management, presenting illustrations and explaining how to interpret financial data. Findings: Managing credit risk contributes to decrease the company’s risk and to increase its value. Companies may establish credit policies to build relationships of respect and trust with customers. Moreover, it helps to decrease the company’s indebtedness, and to increase liquidity. Finally, a company that control customers’ credit avoids losing money due to customer’s insolvency. Originality: This paper represents a major contribution to the empirical literature and practice of managing credit. An in-depth study of the thematic is provided. We explain all the inputs needed for a future implementation of a customer credit limit, and how the company can manage credit in the way to maximize its value and minimize risk.