Developing a credit management policy

Most companies blame unpaid debt on business customers who are
reluctant to pay. The reality is it is often that their own credit
management system (or, lack of adequate policies) are usually at fault.

While there will always be the odd customer who goes bankrupt, refuses
to pay or simply needs a great deal of prodding before they will pay,
developing and maintaining a credit management policy will reduce the
number of late payments and bad debts your company experiences.

Credit management starts with the sale and does not stop until the full
and final payment has been received.  It is as important a part of the
deal as closing the sale. In fact, a sale is technically not a sale until the
money has been collected.

So how should you approach your credit management?

First, be sure to credit check your customers.  Don't sell blind. Before
you issue credit to new customers you should first evaluate their ability
to pay.

There are several ways of credit-checking customers. Bank and trade
references that the new customer supplies can be useful, but the best
way is to use the services of a credit reporting agency.  A credit report
will give you full details of financial results, payment history, court
judgements, liens on assets and other valuable information.

Reevaluating existing customers' credit histories on a regular basis is
also important. Circumstances change so you can't assume that a
business with a steady habit of paying invoices on time will never run
into trouble. Use your own payment experiences to spot any potential
problems; late payments, excuses that they never received invoices or
NSF checks should all raise flags that the customer is in need of a new
and more thorough credit review.

If your credit inquiries reveal a less than perfect credit history, it doesn't
necessarily mean you should not do business with that customer. It
does, however, allow you to make an informed decision about the level
of risk that are you willing to accept to capture sales. A good credit
manager will look for new and innovative ways to sell to marginal
accounts.  Prepayment on the first order?  Or, 50% down payment and
the balance on net terms?  What about personal guarantys, standby
letters of credit or subordination agreements?  All of these mechanisms,
when properly employed, will allow you to advance the sales of your
business while limiting your risk.

If credit checking all your customers is too time-consuming or expensive,
you can possibly introduce lower credit limits for first time customers with
small initial orders and only do full checks on customers that want to
place larger orders This is particularly useful for new customers when
you don't know if it will be a one-time sale or the start of a longer
relationship worth investing the time for a more thorough review.

Establish your terms of sale

Your terms of sale (or, terms and conditions of sale), protect your rights
as a seller. They should be clearly defined as part of an annual sales or
credit contract that your buyer must sign every year if they wish to place
orders with your business.

But, what if the buyer has stated their own terms of sale? - equally
detailed and equally legal. This may state their own rights to reject the
goods or services if they are not of acceptable standards, and may
include their own payment terms.  When this happens, whose payment
terms apply? This is where you need to STOP and come to an
understanding BEFORE you ship the merchandise.

Most companies print their terms on their invoices, but it is also a good
idea to clearly state them on orders or contracts so that they can be  
examined by both the buyer and seller at the start of the transaction.
Print a box on the front of the document asking the customer to sign it,
stating that he or she agrees to the terms and conditions of sale.

Make sure you have full customer details

Make sure you know exactly who the customer is - it's amazing how
many companies and creditors don't.  If there is a problem with a late
payment, it will help you considerably if you have full customer details;
mailing  address, physical address, phone and fax numbers, email
address, business tax ID number, etc..

Invoice promptly and accurately

Invoices should be issued within 24 hours of the merchandise being
shipped or the service being performed. Invoices should contain all the
necessary information and should be checked for accuracy.

Invoices should contain the following information:

Name and address of the company making the sale.

Remittance address to mail payment.

Name and phone number to send inquires.

Terms and conditions of sale.

Invoice number.

Your order number.

The customer's purchase order number.

Description of merchandise or service.

Unit prices.

Shipment date.

Method of shipment.

Total amount due.

Payment terms.

Payment net due date.

Discounts given (if any).

Track unpaid invoices

Carefully monitor your A/R as the invoices age.  Even if the invoice(s)
are not due yet, it's wise to anticipate when you should be receiving
payment.

To effectively monitor your accounts receivables, you need to produce
an accounts receivable aging report which tracks invoices until they are
paid. Computerised software can do this for you.  As you track unpaid
invoices, keep an eye on how much is due and when it is due.

Tracking invoices from the moment a sale is made makes it easier to
see when invoices are overdue - and by how long - thus triggering your
collection process.

You should check your accounts receivable aging report once a week,
and make sure it's up-to-date by noting when payments were actually
received. This will give you a historical record in case you want to
examine an individual customer's payment history and/or analyse the
efficiency of your credit department.

Collecting the cash

Most customers will pay you on time and in full with no problems.  
Others will not.  On those invoices that run past due, it could be a
simple oversight, an administrative delay or perhaps your customer is  
waiting for payment themselves from another vendor.  Whatever the
reason for the past due status on their account, the more actively you
pursue the debt - without becoming overly aggressive - the better
chance you have of actually getting paid. They will be able to tell that
you are serious and that, politely of course, you won't leave them alone
until you have received payment.

Set your own criteria so that once an unpaid invoice is so many days
overdue - you have already placed a collection plan into action. This
may start with the mailing of a friendly reminder letter, and then a
telephone call and then a series of letters and calls that escalate as the
invoice(s) remain unpaid.

If the customer is continuing to place orders for goods or services, you
may have some leverage here by placing their account on a credit hold
until the past due balance is paid to a current status.

There is no such thing as a definitive credit management policy. You
need to develop one which meets the needs of your business and is
competitive with others in your industry.

And even when you have a policy there may always be exceptions you
want to make for favored or long-standing and important customers.

Always remember that the function of the credit department is to support
sales.  So, it's important to share with the sales staff what the policy is.
Enforcing the credit limits and checks on over-enthusiastic sales staff
can be a particular challenge. If you have a sales team you need to
make it clear that their role is not just to sell, but to sell to clients who
can and will pay. This doesn't mean you should hold them accountable
for every bad debt. But it does mean that you can insist they follow a set
process and consult you (or other senior decision maker) if they feel the
need to deviate from set policy. A credit management policy will only
work if everyone in the organization who deals with customers takes it
seriously.
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