Managing the Credit Policy

As we pointed-out earlier, having a clearly defined credit policy will make
everyone's job easier, as people in the business organization will know:

1)  What is necessary to open new accounts.

2)  How credit is evaluated.

3)  How problems with billing issues are handled.

4)  Who should be contacted about specific problems.

5)  The goals of the sales and finance departments.

6)  What happens when an account becomes overdue.

The benefits of having these topics defined is that:

1)  New accounts will be opened faster and orders shipped in a timely

2)  The credit decision making becomes a logical function based on
pre-determined parameters. This simplifies the decision process and yields a
sense of fairness that will work to improve customer relations.

3)  Billing issues and disputes will be addressed faster and persistent
problems will be addressed and eliminated.

4)  People both inside and outside of your company will no longer be
annoyed by phone calls and letters to the wrong people.  Customer calls will
quickly be routed to the correct area for action.

5)  A global picture of how to achieve the sales goals and satisfy the
cash-flow needs of the business will be addressed.

6)  Consitency in how overdue accounts are handled will allow ample time for
the sales department to intervene and "save a customer", while stops are in
place to ensure that action is being taken by the collection department so
that past due accounts do not become bad debts for the company.

As you  can see, developing a credit policy not only ensures the work-flow of
the credit department, but, it is also an opportunity to improve the efficiency
of your entire organization.

Developing your policy

In order to write a policy, there are at least six questions that you and your
company must answer:

What is our mission?  Is it to grow a new company?  Grow the sales of an
established company to increase market share?

What are our goals?  Is it strictly growth?  Strictly profitability?  A
combination?  Are you trying to sell through stale inventory?  Is the market
growing or declining in your industry?  

Who has specific credit responsibilities?  Does the credit manager have the
final say?  Can the Controller or CFO intervene?  How much say does the
sales manager have?  What roll does the CEO play in setting policy

How is credit evaluated?  Are you selling to a select few large customers that
require extensive credit analysis?  If so, is it possible for the credit manager
to visit these accounts to gather more information?  Or, is your business
dealing with a large number of smaller accounts?  If this is the case, what
procedures are in place to credit-check these smaller volume accounts?

How is collection handled?  Are statements sent to customers monthly?  Do
you have an automated system of sending dunning notices in the mail?  
When is the first notice sent?  When is the first phone call made?  Is the
sales organization involved in helping you to collect on past due receivables?

What are our terms of sale?  Can your terms of sale realize the cash-flow
needs of your company?  Allowing your customers terms of Net 90 days
while your company is being made to pay your own suppliers of raw materials
in Net 30 days can create an operating cash shortage in a growing company.


When you start to draft your credit policy you may be surprised (or maybe
not) to find that your policy will encompass many areas of the company.  
Some hard questions will have to be asked of senior management about how
they see the business growing in the future and the types of risks they are
willing to realize in order to achieve that growth.  Furthermore, your written
policy will impact a variety of people including;

1)  Sales force - How they open new accounts, write orders and effectively
deal with delinquent accounts.

2)  Warehouse and shipping - how orders are processed and how return
orders for defective merchandise/services are handled for customer credit.

3)  Controller -  how you order raw materials and services from your vendors
and the payment terms that your business must abide by - and how it fits with
how you are allowing your customers to be billed.

Are you ready? has made putting together a credit policy
manual easy.  We have included a complete policy manual on our subscriber
documents page.  While we have already stated that not every business can
use the same policy, our draft documents are a great place to start; you can
simply add or delete parts that are relevant to your business.  We've saved
you weeks of typing with our ready to use documents.
Strategy Page 4
Credit Strategy - Page 3 - Policy Development