What does credit management involve?

Credit management primarily involves managing credit policies and collections. This aspect of financial management is crucial for small businesses as it directly impacts cash flow and financial stability. Effective credit management ensures that a company assesses the creditworthiness of its customers, sets appropriate credit limits, and monitors outstanding receivables. This process helps minimize bad debts and ensures that the business maintains a healthy relationship with its customers while securing its financial interests.

By managing credit policies, a business can articulate clear terms regarding payment schedules and interest rates, leading to better collections. Collections require follow-up on outstanding accounts, which is essential to keep cash flowing into the business. With proper credit management, businesses can optimize their liquidity and reduce risks associated with extending credit.

The other areas mentioned, such as setting prices for products, designing financial audits, and evaluating investment opportunities, relate to different aspects of financial management but do not encompass the specific responsibilities and goals of credit management. Thus, the correct choice accurately captures the essence and importance of credit management within the framework of managing small business finances.