A great deal has been written about managing accounts receivables.  In
fact, probably too much has been written about managing accounts
receivables – because much of it is fluff!  We are going to spare you the
eye strain and get right down to business.

The role of the credit manager is to plan, organize, lead and control the
credit function.


A good place to start is with a mission statement.  Something like:

“The credit department is responsible for maximizing sales while
maintaining the highest quality possible of accounts receivable.  We strive
to provide flexible mechanisms to sell to a broad range of customers while
ensuring that only prudent credit risks are taken and cash-flow is

Remember that the credit department is in a support role for the sales
department.  You will not earn a salary unless your business sells its goods
and/or services.  At the same time, your business will not be around for
long unless all of those sales orders and shipments are turned into cash.  
While the sales and credit areas may often be at odds over the risks that
need to be taken, it is imperative that both credit and sales work together
toward a mutual goal; the long term growth and profitability of the business.

Now that we understand that the credit function may not operate in a
vacuum, and that the goal is to maximize sales while minimizing risk, it is
important for upper level management to be “on board” with the goals of
the accounts receivable department and how they relate to furthering the
sales and profitability of the organization.

Credit policies will vary

The general attitude toward credit will vary greatly from one business to
another.  For example, a young start-up company may need to allow liberal
credit terms in order to induce potential customers to place their first
orders.  On the other hand, a mature company with a solid reputation for
taking care of customers may demand a more conservative approach to
granting credit to customers.  You have to ask yourself, what is our
reputation?  Can we insist on guarantys, letters of credit and third parties
agreements to pay?  Or, do we have to grant credit to the higher risk
businesses in order to increase our customer base to start?

Establish Goals

Every year, company-wide goals should be established for both sales and
the credit and collections function.  Goals may include:

The number of new accounts to be opened.

The percentage of bad debts to sales that are deemed reasonable.

The percentages of past due accounts that are allowable.


Define Responsibilities

Knowing who is supposed to do what, and the level of authority of each
party, will eliminate the duplication of efforts and further streamline the
organization and its processes.  Often, as part of a policy statement, it is
wise to define the different functions and responsibilities of the people in
your department.  Such as:

“The credit department reports to the Chief Financial Officer.  The credit
department is responsible for opening new accounts, extending credit
limits, collections of accounts receivables, and cash application.  The credit
manager establishes all credit limits and has oversight on all accounts with
accounts receivable-based problems.  The credit manager has the final
say on which accounts will be placed on credit hold and which orders may
be released for shipment.  The only person that may override the credit
manager’s decision is the CFO.”

Evaluating Credit Worthiness

Depending on the size of your organization, the evaluation of credit can be
as simple or as complex as the business mandates.  For example, if you
are plagued by small orders for numerous accounts, it may be too
expensive and too time consuming to thoroughly credit check each and
every applicant.  In such an instance, you may set your policy to allow small
orders (under a certain dollar threshold) to be opened and shipped without
a full credit review; while larger orders/accounts will receive a more
concentrated review.

Again, it all depends on the size and scope of your business.  But, for multi-
million dollar sales to new (or existing) accounts, a complete credit review
will be needed.

This part of your policy may say,

“New customer orders for amounts under $1,000 shall be sold on a prepaid
basis only; we accept checks, money orders or credit cards for all orders
under $1,000.  Orders from $1,000 to $5,000 will be credit checked by
contacting 2 references provided and reviewing a report from a credit-
scoring agency.  Orders for new customers in excess of $5,000 will require
credit checks on 3 references provided, and a bank reference, and a
report from the credit agency, and a review of the business financial
statements of the applicant for the previous fiscal year.”

Of course, how much time you spend reviewing those financial statements
will again depend on the size of the order and amount of credit you are
comfortable in extending.

Other Important Policy Statements

There is no substitute for a clearly written, signed credit contract
(application).  Make sure that it’s part of your credit business strategy.  A
credit application with legally binding agreements, signed by an authorized
officer of the company you are selling, places you at an extreme advantage
if you run into payment problems with your debtor/customer.  Your policy
statement may say:

“We require a credit application be completed by every customer and
signed by an officer of the debtor company.”


Why have a credit policy?

In establishing any policy within your organization, the entire organization
must be committed to adhering to it.  This is when the credit department
has to sell to the sales staff.  You have to convince them that guidance
from a clearly written credit policy will:

Create a credit policy treats all customers fairly.

It will help solve recurring problems quickly for the customers.

It will clearly define the job structure and route problems to the correct
problem solvers.

It will assist the company as a whole to achieve their objectives and goals.

Again, upper level management must be involved in this process since
other factors must be considered, such as:

How competitive is your industry
What are your goals for market share?
What are your profit margins?
What are your cash requirements?  How fast do you need to be paid?


Another important point is that once you have a credit policy, it isn't set in
stone. Competition, the economy, changes within your market or your
company will demand that you adjust the credit policy. It is easier to make
small adjustments than it is to have to do a complete overhaul because you
waited too long.

As time progresses, you may find that your product line changes, and your
customers’ buying habits may change as well.  Technology may allow for
improvements in how you ship, bill and get paid by your customers.  Again,
it’s important to stay abreast of current trends and keep your credit policy
constantly updated, rather than wait until it becomes a stale policy
document that people ignore within the organization.
Strategy Page 3

Credit Strategy - Page 2 - Policy Development