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. Planning 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 maintained.” 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. Organize 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.” Lead 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? Control 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. |
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