Credit management is a critical component of any business operation, especially for multinational companies (MNCs) with subsidiaries in India. Efficiently managing credit is vital for maintaining liquidity, optimizing cash flow, and ensuring the financial health of an organization. In India, effective credit management becomes even more essential due to the complex regulatory environment and the varying payment practices across industries. A lack of focus on credit management can lead to delayed payments, bad debts, and cash flow issues, which can severely impact the subsidiary’s overall performance.
According to a 2023 survey conducted by Atradius, Indian businesses face significant payment delays, with over 50% of invoices remaining unpaid beyond the due date. Indian companies tend to have an average payment delay of around 45-50 days, significantly higher than the global average of 33 days. These delays lead to a working capital squeeze and put added pressure on MNCs to optimize their credit management strategies in their Indian subsidiaries.
This blog will explore the key challenges associated with credit management in Indian subsidiaries and provide strategies to overcome them, ensuring smoother cash flow and fewer outstanding debts.
Challenges in Credit Management for Indian Subsidiaries
- Diverse Credit Terms
Indian businesses often have diverse credit terms depending on the industry and region. Some companies may offer extended payment terms, while others stick to shorter cycles. The inconsistency in credit terms can make it challenging for MNC subsidiaries to manage cash flow effectively. For instance, sectors like construction and manufacturing typically operate on longer credit cycles, whereas retail might have shorter payment periods.
- Delayed Payments
Delayed payments are a common issue in India, as mentioned earlier, with many invoices remaining unpaid for extended periods. Businesses often extend credit to clients without fully assessing their creditworthiness, resulting in payment delays or defaults. Such delays strain working capital, making it difficult for the subsidiary to meet its financial obligations.
- Lack of Credit Assessment
Many companies in India, including MNC subsidiaries, fail to conduct thorough credit assessments before extending credit to clients. Without proper credit evaluation, businesses risk entering into transactions with clients who may have poor payment histories or unstable financial conditions, increasing the risk of bad debts.
- Poor Collection Practices
In many Indian businesses, there is a lack of structured debt collection processes, resulting in prolonged payment cycles. While the legal framework exists to deal with non-payments, the process can be slow and bureaucratic, making it challenging for MNC subsidiaries to recover outstanding dues in a timely manner.
- Regulatory Hurdles
India has a complex regulatory environment, and credit management can sometimes be hindered by various compliance requirements, especially when dealing with cross-border transactions. MNCs need to ensure that they comply with local regulations while managing credit risks. Non-compliance can result in penalties, further complicating the credit management process.
- Currency Fluctuations and Foreign Exchange Risk
When dealing with credit in foreign currencies, subsidiaries face the challenge of currency fluctuations, which can impact the amount receivable. Foreign exchange risks can complicate credit management, as the final payment received might vary due to currency value changes.
Strategies for Effective Credit Management in Indian Subsidiaries
Given the challenges outlined above, here are some key strategies MNC subsidiaries in India can adopt to ensure effective credit management:
- Conduct Thorough Credit Assessments
Before extending credit to any client, it is critical to conduct comprehensive credit assessments. This involves checking the client’s payment history, credit score, financial health, and market reputation. By thoroughly assessing creditworthiness, MNCs can reduce the risk of delayed payments or defaults. Credit management tools like Dun & Bradstreet, Equifax, or CRIF High Mark can help in conducting accurate credit evaluations.
- Set Clear Credit Policies
Having a well-defined credit policy in place is essential. The policy should outline clear terms for payment deadlines, penalties for late payments, and the credit limit extended to each client. Ensuring that all clients are aware of and agree to these terms helps set the expectation for timely payments. Regularly reviewing and updating the credit policy can also help adapt to changing market conditions.
- Implement Automation Tools for Credit Management
Leveraging technology is crucial for streamlining credit management processes. Automation tools like SAP Ariba, Zoho Books, and QuickBooks allow businesses to track outstanding invoices, set payment reminders, and automatically flag overdue accounts. These tools not only improve the efficiency of credit management but also reduce manual errors and administrative overheads.
- Strengthen Debt Collection Practices
Effective debt collection practices can significantly reduce the number of overdue accounts. MNCs should establish a dedicated collections team that regularly follows up on unpaid invoices. Setting up automated reminders and communication with clients regarding outstanding payments ensures that invoices do not slip through the cracks. In cases of severe delays, legal action may be necessary to recover funds, and it is essential to be aware of India’s debt recovery laws.
- Monitor and Improve Cash Flow Management
Cash flow management is closely tied to credit management. MNC subsidiaries should actively monitor their cash flow to ensure they have enough liquidity to meet their obligations, even in the face of delayed payments. Cash flow forecasting tools can help businesses predict future cash inflows and outflows, allowing them to take preventive measures if a cash shortage is anticipated.
- Utilize Trade Credit Insurance
Trade credit insurance is an excellent tool for mitigating the risk of non-payment from clients. By purchasing credit insurance, MNC subsidiaries can protect themselves from the financial consequences of bad debts or client insolvency. This type of insurance can provide compensation for unpaid invoices, ensuring the subsidiary’s financial stability even in the event of defaults.
- Regularly Review Client Relationships
It is essential to regularly review client relationships, especially those with a history of late payments or erratic behavior. Subsidiaries should reassess credit terms or limit exposure to high-risk clients. Offering shorter credit terms or requiring partial upfront payments can help mitigate risk while still maintaining business relationships.
- Manage Foreign Exchange Risk
For MNCs dealing with cross-border transactions, managing foreign exchange risk is crucial. By using financial instruments such as forward contracts or currency hedging, subsidiaries can protect themselves from fluctuations in currency value, ensuring that they receive the expected amount of payment without losses due to exchange rate changes.
How Finsmart Accounting Can Help
Efficient credit management is crucial to the success of your Indian subsidiary. At Finsmart Accounting, we offer comprehensive credit management solutions tailored to the unique needs of MNCs operating in India. Our team of experts stays updated on local regulations and credit practices, ensuring that your subsidiary maintains healthy cash flow and mitigates the risks of bad debts.
Here’s how we can support you:
- Credit Risk Assessment: We perform thorough credit assessments using industry-leading tools.
- Automation of Credit Processes: We implement technology-driven solutions to streamline your credit management.
- Effective Debt Collection: Our team ensures timely follow-up and collection of overdue accounts.
- Cash Flow Management: We provide tailored cash flow solutions to keep your subsidiary liquid.
- Foreign Exchange Risk Management: We help you manage currency fluctuations and ensure compliance with Indian regulations.
By partnering with Finsmart Accounting, you can ensure a robust and efficient credit management system, enabling your Indian subsidiary to thrive in a competitive market. Contact us today to learn more about our services!
Founder & Director
Shalaka Joshi, a Chartered Accountant passionate about outsourcing and problem-solving, brings over 20 years of extensive experience in accounting, payroll, and MIS reporting to her professional endeavors
