In the professional Accounts Receivable (AR) field, what is meant by Credit Management?

Introduction / Context:
In the Accounts Receivable (AR) function, Credit Management is a key discipline that balances the desire to increase sales on credit with the need to control default risk. It involves decisions about whom to extend credit to, on what terms, and how to follow up on outstanding receivables. This question tests your understanding of Credit Management as a structured process rather than a casual decision.

Given Data / Assumptions:

• The context is professional Accounts Receivable and credit control in a business organisation.
• Customers often request credit terms instead of paying immediately in cash.
• The company wants to grow sales while keeping bad debts and overdue receivables at acceptable levels.
• Credit decisions affect cash flow, profitability, and risk.

Concept / Approach:
Credit Management is the systematic process of formulating credit policies, assessing customer creditworthiness, setting appropriate credit limits and payment terms, and monitoring receivables to ensure timely collection. It includes analysing financial statements, using credit ratings, reviewing payment history, and using tools like credit insurance or guarantees where necessary. Effective Credit Management reduces bad debts, improves cash flow, and supports profitable growth by granting credit only where the risk–return balance is acceptable.

Step-by-Step Solution:
Step 1: Recognise that granting credit is essentially giving customers time to pay, which creates Accounts Receivable. Step 2: Understand that if credit is granted without proper checks, the business may suffer late payments or non payment, leading to bad debts. Step 3: Identify key activities in Credit Management, such as setting credit policies, gathering customer financial information, performing credit checks, and approving or rejecting credit applications. Step 4: Note that after credit is granted, Credit Management also involves monitoring ageing reports, following up on overdue accounts, and revising limits if risk increases. Step 5: Select the option that summarises these activities: setting policies, evaluating creditworthiness, setting limits, and monitoring collections to control bad debts.

Verification / Alternative check:
In many organisations, there is a dedicated Credit Control or Credit Management team within the finance or AR function. Their job descriptions typically mention reviewing customer credit applications, assigning risk ratings, approving credit limits, monitoring overdue accounts, and working with sales and legal teams on collections or recovery. This matches the description in the correct option and confirms that Credit Management is not just paying suppliers or doing advertising.

Why Other Options Are Wrong:
Paying suppliers only in cash relates to Accounts Payable, not Accounts Receivable, and is the opposite of extending credit to customers. Central bank monetary policy is a macroeconomic tool and not part of a company's AR operations. Marketing and brand promotion are important but are handled by the marketing department, not by Credit Management, whose focus is on customer payment risk and receivables control.

Common Pitfalls:
Some candidates confuse Credit Management with general cash management or overall financial planning. Others think it is purely a sales function, ignoring the risk assessment and control aspects. Another mistake is to assume that credit checks can be skipped for long standing customers, which can lead to hidden build up of risk. In reality, Credit Management is a continuous, structured process requiring cooperation between sales, finance, and sometimes legal teams.

Final Answer:
Credit Management under Accounts Receivable is the process of setting credit policies, evaluating customer creditworthiness, setting credit limits, and monitoring collections to control bad debts.