Basic Outline for Developing a Credit Policy

An Expert's View about Domestic Credit Policy in the United States

Posted on: 8 Mar 2012

If your goal is to effectively manage your credit process and make it a part of your organization's success, developing a credit policy should be the top of your list.

Basic Outline for Developing a Credit Policy- Credit-to-Cash Advisor e-Newsletter ARTICLES RESOURCES CONTACT US ABC-AMEGA INC. LINKS Basic Outline for a Basic Outline for Developing a Credit Credit Policy Policy D/P, D/A and International Sales Originally published: Dec-08-2011 View More Articles on Credit Management Debt Collection RFP Credit policy: a document providing ?clear, Receivables Based written guidelines that set (1) the terms and Financing conditions for supplying goods or services on credit, (2) customer qualification criteria, (3) Escheatment procedures for making collections and (4) steps to be taken in case of customer delinquency.? Using DSO to Measure ( Collection Efficiency A credit policy, however, should be more than a Credit Extensions are list of credit department guidelines. Properly Loans developed, it can be a critical tool for maintaining alignment on credit issues throughout your Final and Binding company. Arbitration A well-written, comprehensive credit policy communicates a consistent standard Understanding the Cash to your customers. It documents and supports corporate goals, clarifies Flow Statement authorization levels, defines expectations and responsibilities and enhances cross-functional cooperation especially between the credit and sales Understanding the departments. Income Statement Sounds great, right? So, where do you begin? Understanding the Balance Sheet While there is no single definitive credit policy, this article outlines some of the items you should include. We have also provided sample text you can edit and Credit and Collection customize for use in creating a credit policy that meets the needs of your Policy Basics particular organization. DuPont Analysis Outline of a Credit Policy Collection Effectiveness Section 1: Credit Department Mission Index Start by developing your mission statement. You will want to get input from upper level management and the sales department. It?s important that Sales Altman Z Score understands how the credit department will work to help ensure their success within the corporate guidelines. Setting a Reasonable Credit Limit The credit department mission should fully align with the corporate mission. Policies should reflect corporate goals within its specific industry, as well as the Red Flags company's capacity for risk. For instance, new companies may have to take on higher risk customers in order to develop market share. Firmly established Chinese Credit organizations may be able to control their credit risk more stringently. Management Part 2 Sample Text for Credit Department Mission Chinese Credit Management Part 1 To support the financial goals of [company] and, specifically, to support its sales efforts, while maintaining the highest quality of accounts receivable within the Political Risk Insurance corporation?s capacity for risk. International Financial To provide flexible mechanisms to sell to a broad range of customers while[02/27/2012 3:59:07 PM] Basic Outline for Developing a Credit Policy- Credit-to-Cash Advisor e-Newsletter Reporting Standards to ensuring that only prudent credit risks are taken and cash flow is maintained. Replace GAAP To maintain customer goodwill during the collection process. Industry Credit Groups To keep Sales and senior management informed about emerging problems including uncollectible accounts and order holds. Increase in USD Value Abroad Poses Difficult Section 2: Credit Department Goals Foreign Exchange Issue for US Exporter Goals should be set based on your company?s cash flow requirements. They should track with current market conditions, reflect the strategic direction of the Effective Credit organization, support sales objectives, and change based on the general Management economic situation and the financial requirements of the company. Extending Credit to a Any targets selected should be based on industry benchmarks, where possible, or Troubled Company on improving your own past results. Cash Flow and DSO Some possible goals might be: Credit To open XX new accounts during the course of the year. and Collections Policy A target for the percentage of bad debts to sales. Percentage targets for acceptable account aging, i.e. % current, average Credit Crunch Increases days delinquent, percent over 90 days past due. Reliance on Trade Credit Targets for typical receivables ratios used by your department, i.e. Collection Effectiveness Index (CEI), Days Sales Outstanding (DSO), Accounting for percentage of sales ultimately written off, etc. Uncollectible Accounts Section 3: Roles, Responsibilities and Authorization Level Hello? Do You Speak This section should contain a brief description of the roles and responsibilities of English? each department member. You can include written job descriptions, if desired. Reducing Delinquent Sample Text Accounts CFO ? Ultimate authority for Credit Department; hires/fires, sets overall New LC Rules policy. Credit Director/Manager ? Reports to the CFO. Plans, organizes, leads Reliability of Financial and controls the credit function. Responsible for day-to-day management Statements and training of the credit staff, determines procedures and rules for the entire department, authorizes credit limits over $500.00. Selects outside Export Trade to Latin collection agencies and/or outsourcing firms with the approval of the CFO. America Billing/Invoicing Manager ? Reports to the Credit Manager. Responsible It Isn't Just the Four Cs for the day-to-day management and training of the personnel within the of Credit Anymore Billing Department, maintaining high standards of invoice accuracy, handling invoicing disputes, deductions and all matters pertaining to Trade Credit Insurance billing. Reviews the daily aging report. Collections Manager ? Reports to the Credit Manager. Responsible for The Rules for Letters of the day-to-day management and training of the in-house collection team. Credit are Changing! Coordinates with outside collection agencies. Has input into the selection of any outside collection resources. Authorizes payment terms with the International Sales approval of the Credit Director. Contracts Credit Analyst ? Reports to the Credit Manager. Obtains and analyzes Business Credit Fraud: financials, analyzes credit reports for clients requesting credit limits of Let the Seller Beware more than $500, assigns credit limits up to $250.00. Billing Clerk ? Reports to the Billing Manager. Responsible for preparing Credit and Collections in the invoices and ensuring that they are sent on time, maintains the aging the United States report, provides other support services to the Billing Manager as required. Collection Specialist ? Reports to the Collections Manager. Contacts past Comparing DSO Figures due accounts per requirements. Accepts payment terms with the approval of the Collections Manager. Maintains records in collection system. Getting Paid on Exports[02/27/2012 3:59:07 PM] Basic Outline for Developing a Credit Policy- Credit-to-Cash Advisor e-Newsletter Credit and Collection Assistant ? Obtains signed credit applications, Credit Insurance reviews for completeness. Requests credit references and follows up. Pulls Questions and Answers credit reports. Provides other support functions as needed. Collecting from a Risky Section 4: Procedures Customer This is the nuts and bolts of your credit policy. It?s essential that the rules apply to all customers, with very few exceptions, and that they are consistently Resolving Accounts enforced. The procedures should be somewhat flexible, but not so vague that Receivable Disputes they are subject to interpretation by every member of the department. Situations Importance of Knowing where flexibility is possible and the hierarchy for approval of changes should be Customer's Legal well defined. Identity As with your goals, the procedures should update periodically to take advantage of best practices, technology, or anything new that can improve your processes Selling without and results. Financials In this section, include the processes for: Sales vs. Credit 1. Evaluating New Customers? Creditworthiness Sources of information you can leverage to help determine credit risk are: Home industry credit groups, credit bureau reports, financial statements, credit references, public records, and information provided by applicants. Sign up for our e-Newsletter Sample Matrix ">Credit Requested ">Obtain Application ">Check ">Initial ">Credit Credit Credit ">Approval Completed References Terms Limit Limit Report and Signed Prepaid <$250.00 Yes Yes No then $250.00 Analyst Net 30 Due on $500- Basic Receipt $500- Credit Yes Yes $2500 Report then $2500 Manager Net 30 Yes 50% on w/signed 1st Full Credit >$2500 personal Yes order ???? Report Manaager guarantee then & financials Net 30 Sample Text regarding the Credit Application We require a credit application to be fully completed by every customer and signed by an authorized officer of the debtor company. For information on why a signed credit application is essential and what it should contain, read ?Credit Extensions are Loans: Insist on a Completed Credit Application?.) 2. Reevaluating the Creditworthiness of Existing Customers Reevaluate the credit histories of existing customers on a regular basis ? at least annually. It?s a good idea to create a schedule (or matrix) for reevaluation, perhaps based on the size of the customer?s credit limit. You?ll also want to define exactly what your department needs to review: credit report, financials, credit group information, etc. 3. Terms and Conditions of Sale Your terms and conditions of sale protect your rights as a seller. They[02/27/2012 3:59:07 PM] Basic Outline for Developing a Credit Policy- Credit-to-Cash Advisor e-Newsletter should be included on all sales documents. They should be included on your credit application together with a statement requiring a signature, for example: ?I have read and agree to the terms and conditions as stated on this document.? Terms should also be included on sales contracts, orders and invoices, even emails related to the sale. In addition, you may want to require large customers to sign an annual sales or credit contract, which would include your terms of sale and their credit limit. The sample matrix above assumes that the customer was found to be creditworthy. What about customers that are borderline? Remember your mission: "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." It's the credit manager's job to look for new and innovative ways to sell to marginal accounts. Rather than declining them out of hand, consider prepayment on the first order, security (UCC9), 50% down payment ? For international customers, consider using D/Ps, D/As or L/Cs to provide a greater level of security than open account. (See "D/P, D/A and International Sales Transactions") 4. Invoicing Sample Text for Invoicing Procedures: All invoices should be issued within 24 hours of the merchandise being shipped. Invoices must contain: Name and address of the customer. Remittance address or electronic transfer information (ACH, wire) Contact information for inquiries/questions Terms and conditions of sale Invoice number, order number, customer?s PO number Description of merchandise or services Unit prices, total amount due Shipment date and method of shipment Due date, discounts (if any) The aging report of all invoices must be kept updated on a daily basis by the billing clerk. This aging report must be checked once per week by the Billing Manager to ensure accurate aging information. Aging information is provided to the Collections Manager for appropriate handling. 5. Collections Even with your best efforts to carefully and consistently manage your receivables, there will be some accounts that don?t get paid on time. Having a plan for handling these accounts quickly and actively can increase the likelihood of collecting past due amounts. (See " Probability of Collecting on Past Due Accounts".) In fact, we recommend starting your contacts before the invoice actually becomes due, at least on larger accounts. Sample Collections Matrix (Net 30 terms) "From ">Portfolio[02/27/2012 3:59:07 PM] Basic Outline for Developing a Credit Policy- Credit-to-Cash Advisor e-Newsletter Oldest ">Portfolio A ">Portfolio B ">Portfolio C D Invoice $5000+ $2500-$5000 $500-$2500 <$500 Date 0-20 Current Current Current Current days 20-30 Current-F/U Current-F/U Call Current-F/U Call days Ltr/Email F/U F/U 37-40 In-House F/U Call In-House F/U Call Collection Collection days Ltr/Email Ltr/Email In-House In-House 45-50 In-House In-House Collection Collection Collection days Collection Call #1 Call #1 Call #1 Ltr #1 Escalation to In-House In-House 55-60 Collections Mgr- In-House Collection Collection Collection days collection call; Call #2 Call #2 Ltr #2 credit hold Escalation to In-House Final Review by Credit 65-70 Collection Mgr; Final Final Demand Demand Mgr-Final Demand days Demand Call; credit Call; credit Letter; Call hold hold credit hold 75-90 To 3rd-party Review by Credit to 3rd-party to agency days agency Mgr; to agency agency Sample Text The calls and letters at 20-30 days should ask: if the shipment was received, if there were any issues with the service/products, if the invoice was accurate, remind the customer of the payment due date and ask if there is any reason that the invoice might not be paid on time. (See "Nine Collection Tips for Small Business".) The follow-up calls, letters and emails at 37-40 days are to be cordial reminders of the invoice due date and determine if the customer has any problems with paying. The collection calls, letters and emails at 45-50 days should be firm requests for payment. Subsequent contacts should request immediate payment or, if the customer instigates, discuss payment plans. (See ?Six Tips for Making Collection Calls that Get Results? and ?6 Secrets for Writing Effective Collection Letters?.) Depending upon the results of your in-house efforts, you could bump up the period when you place with the 3rd-party collection agency, or hang onto the account a bit longer. However, it?s not recommended that you hold any account longer than 90 days past the due date. (See "B2B Collection Agency Placement Strategies: Beyond Aging Out") Other items you may want to include in this section of your credit policy: Disputes and Deductions: How to respond. Who has authority to approve. Credit Holds: When to place an account on credit hold. Who authorizes credit holds. Payment Plans: Who can propose and approve payment restructuring plans. Write-offs: When to write off an account to bad debt. 3rd-party Collections: When and who authorizes forwarding an[02/27/2012 3:59:07 PM] Basic Outline for Developing a Credit Policy- Credit-to-Cash Advisor e-Newsletter account to a 3rd-party collection agency. Law Suits: How to determine whether to sue. Section 5: Measuring Results Now that you have a credit policy in place, it?s time to measure its effectiveness. This should be done at least quarterly. Start with your aging analysis. Follow with the metrics listed in the Goals (Section 2) of this document. Look at the impact your credit policy has on sales and cash reserves. And, if necessary, revise the policy based on your findings. Conclusion A credit and collection policy can create a structured environment that safeguards one of your organization?s most important assets ? its accounts receivable. To ensure it achieves your organization?s goals, keep these points in mind when formulating your policy: 1. The policy must be a living document, routinely updated in response to the changing economy, market conditions, and the competitive environment. 2. It must be applicable to all of your customers, with limited exceptions. 3. It must incorporate the needs and help to accomplish the goals of management, finance and sales. ***** Subscribe to the Credit-to-Cash Advisor Monthly e-Newsletter -- It's Free This information is provided by ABC-Amega Inc. ABC-Amega is a respected receivable management firm headquartered in the United States with more than 80 years experience in commercial receivable management. Whether your need is industry-specific credit information, transparent first party receivable collection support, third party commercial debt collection, or training in domestic or international collections, credit management ir financial analysis, ABC-Amega offers a solution that will help you achieve improved efficiency, greater effectiveness, and increased cash flow. For more information on ABC-Amega Inc., contact or visit the company web site at © 2003-2012 ABC-Amega Inc. ? Privacy Policy ? Site Map ? 1.716.885.4444 phone ? 1.716.878.2842 fax[02/27/2012 3:59:07 PM]
Posted: 08 March 2012

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