What is the role of credit management in accounts receivable?

The role of credit management in accounts receivable primarily involves assessing the creditworthiness of customers. This is crucial for businesses because it helps them determine the likelihood that customers will fulfill their financial obligations by paying for goods or services on time. Evaluating the creditworthiness involves analyzing various factors such as a customer’s credit history, payment behavior, income levels, and overall financial stability.

Successful credit management can prevent financial losses from bad debts and improve cash flow by ensuring that only customers with a sound credit history are extended credit. This proactive approach contributes significantly to maintaining healthy accounts receivable balances and sustaining the company's financial health.

While authorizing promotions for loyal customers, determining the market value of assets, and handling customer service inquiries are important business functions, they do not directly relate to the specific responsibilities of credit management within accounts receivable. Credit management focuses on evaluating and managing the risks associated with extending credit to customers, which makes the assessment of creditworthiness central to its role.