Frank DuBrava has more than 35 years of experience in credit management. He has taught credit and financial management courses for over 15 years and serves on the NACM/CRF Education Committee. He has spoken at numerous NACM affiliated association meetings, conferences, credit industry groups, and businesses sharing his experience and knowledge on a variety of topics to help credit and collection professionals meet the problems and challenges of the workplace.

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

There are two basic components of a credit policy. The first involves the amount of risk your company is willing to take in granting credit to your customers; and the second involves the amount of effort you are willing to put into the collection effort.

There is a measuring rod for each component. Your credit analysis standards will largely determine the risk factor; and the amount of money you spend on collection will determine its effectiveness.

The following matrix illustrates the four broad categories that emerge from joining the risk and effort components of credit policy. You can, of course, shade these policies in any number of ways, depending upon the precise amount of risk and effort which your company is willing to undertake. Whatever course you follow, you will probably decide to choose a variation on one of the following classifications:

• Strict analysis/strict collection. This policy is suitable primarily for a firm with a well entrenched market position operating in a fairly healthy business environment. In a less favorable climate, this policy can cost too much in sales. Risk analysis is thorough, probably involving more that just a credit bureau check. A fairly large collection staff is needed, but costs may be offset by improved receivable turnover and minimal bad debt loss.

• Strict acceptance/liberal collections. This policy concentrates primarily on good credit risks, assuming that they will pay their bills on time. It is most effective when a cost of capital is low, and customers are in a comfortable financial position. It has been used sparingly in recent years.

• Liberal analysis/strict (vigorous) collections. This policy, or variations of it, are in vogue today, primarily because it has been almost impossible to expand sales without an accommodating credit policy. However, putting the entire emphasis on collection can be costly. High markup, low-unit cost firms usually fare best in this type of policy.

• Liberal Analysis/ Liberal(easy) collections. Only firms with total emphasis on building unit volume should use this policy. Margins should be high to cover inevitable bad debt losses. Despite the risks a few newly organized, high-tech firms have made this policy work in recent years.

Note: Frank E. DuBrava, a leader in the field and well-respected credit exec and commercial credit consultant on both domestic and international issues was based out of Connecticut and passed away in recent years. We include this vital material in his memory.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.

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