Credit management is essential to the ongoing creditworthiness and day-to-day financial functioning of a business. It is possible for a business to successfully make sales but find itself unable to meet its day-to-day financial obligations because it employs poor credit management practices. Credit management involves several distinct functions that contribute to the financial health of a successful business.

Credit Checking

Most commercial enterprises are sales-driven, which is to say that a great emphasis is placed on finding new customers and getting customers to place product orders. The function of credit management in this process is to check the creditworthiness of prospective new customers and continue to monitor the creditworthiness of existing customers. It may be that some prospective customers have such a bad credit rating that it is not worth doing business with them. Credit management is also responsible for negotiating payment terms and conditions with new and existing customers with the intention of minimizing the potential exposure to bad debt. For example, if a customer orders products monthly but only has a payment due every three months, credit managers might renegotiate the credit terms offered to this customer if they suspect that the customer's credit rating has lowered. Monthly terms, or even cash on delivery terms would minimize the amount of outstanding bad debt owed by the customer.

Invoices and Billing

Credit management is responsible for ensuring that invoices, statements and bills are issued to customers, reflecting accurately the current status of the customer's account and the amounts and details of payments due. Invoices must be dispatched early enough for the customer to have time to evaluate the details contained in them and make payment by the due date. An important credit management function is the checking of the details of invoices and statements for accuracy. Inaccuracies could lead to the customer disputing the invoice, resulting in a subsequent delay in payment, which would then adversely effect cash-flow.

Credit Collection

Credit management officers are responsible for identifying bad debts and for taking steps to recover bad debts. This can involve the renegotiation of lines of credit (the cash-value of goods and services that will be supplied to the customer on account), renegotiation of terms of payment for subsequent purchases, and the negotiation of terms to repay currently outstanding amounts. Where a customer is not willing or able to negotiate the repayment of a debt, credit management officers may decide to pass the debt to commercial credit rating and credit collection agencies. In extreme cases, civil actions are instigated, allowing the courts to mandate the recovery of the debt.