 |
|
 |
|
 |
|
 |
|
 |
Our Subscribers Say...
I think Credit Today is fantastic. You cover many practical topics in the credit field that I use regularly. Just one recent example—a conversation on the ListServ about preferential payments—gave me tips that I used in an actual case. The specific information I picked up from this one discussion saved me $10,000, enough to cover my membership for many years!
- Steve Savino
Manager of Credit & Collections, ASSA Abloy Americas Division, New Haven, CT
Credit Today's Resource Directory and their online e-mail forum (ListServ) provide information on almost any credit-related topic you can think of. It is a great way to exchange information with other credit professionals. As the saying goes, "You don't know what you don't know."
- Scott Goen,
Credit Manager, Big Lots Stores, Inc., Wholesale Division
"We've recently started using the ListServ tool within Credit Today. This is phenomenal and powerful forum for gaining immediate feedback, ideas, and suggestions, relative to any credit topic under the sun, all in a real-time e-mail format."
-Javier Vela, Senior Credit Manager, Global Credit Services, JDA Software Group Inc.
"Being a part of the Credit Today online community is like having the expertise of hundreds of credit managers at your fingertips. These credit execs are willing to help you solve topical business issues as they arise. In the current environment of ever increasing competing priorities which reduce our opportunities to meet peers out of the office face-to-face, this is the most valuable tool you can have on your desktop! It's important that we have a mechanism to reach out to our counterparts quickly to exchange knowledge as well as to stay on top of industry trends."
- Victoria Artis, Director of Customer Financial Services, Pfizer, Inc.
"Over the last 10 years I've seen Credit Today evolve from a monthly credit publication into a quality source of information and guidance for the B2B credit community. The website, with its user friendly form downloads, will take you from examples of new account credit applications to bankruptcy forms and everything in between.
The Credit Today ListServ has become the pre-imminent online forum, providing an opportunity for discussion and comments (and occasional humor) from an impressive list of credit professionals."
David Dungan, Director of Credit
Justin Brands, Inc. (A Berkshire Hathaway company)
Fort Worth, Texas
"There are numerous credit periodicals available to the credit professional today. How good is Credit Today? Is it relevant? I always have to read it late, or online because my credit analysts want to read it the minute it comes in. When my staff wants to read a publication before I have a chance to read it then something is working in that publication. We have cancelled our other subscriptions. When you have the best you do not need the rest."
Ron Woods
Corporate Credit Manager-World Wide
Thales Navigation, Inc.
"The newsletter, coupled with the website and the ListServ, are to us, more valuable than any other credit publication, bar none. I try to use at least one article out of each newsletter for departmental training/discussion sessions."
D. Mark Constantine
Corporate Credit Mgr
Fulton Paper Company
"I love Credit Today and read every issue cover to cover. For me, the greatest perk of a subscription is ListServ. I believe Credit Today's ListServ members may be the most knowledgeable Credit brain trust in existence today. I have saved and categorized hundreds of contributions on a wide variety of topics which I refer to often. It's an easy and cost effective way to network and learn."
Doug M. Thomas
Kimberly-Clark Customer Financial Services |
|
|
 |
Basic Outline for Developing a Credit Policy
By Loral A. Narayanan
The following article originally appeared in the December 2011 issue of ABC-Amega's free client newsletter, "Credit-to-Cash Advisor". Credit policy: a document providing "clear, written guidelines that set (1) the terms and conditions for supplying goods or services on credit, (2) customer qualification criteria, (3) procedures for making collections and (4) steps to be taken in case of customer delinquency." (BusinessDictionary.com)
A credit policy, however, should be more than a list of credit department guidelines. Properly developed, it can be a critical tool for maintaining alignment on credit issues throughout your company.
Click here to check out our credit policy library.
|
|
A well-written, comprehensive credit policy communicates a consistent standard to your customers. It documents and supports corporate goals, clarifies authorization levels, defines expectations and responsibilities and enhances cross-functional cooperation especially between the credit and sales departments.
Sounds great, right? So, where do you begin?
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 customize for use in creating a credit policy that meets the needs of your particular organization.
Outline of a Credit Policy
Section 1: Credit Department Mission
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 understands how the credit department will work to help ensure their success within the corporate guidelines.
The credit department mission should fully align with the corporate mission. Policies should reflect corporate goals within its specific industry, as well as the 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 organizations may be able to control their credit risk more stringently.
Sample Text for Credit Department Mission
To support the financial goals of [company] and, specifically, to support its sales efforts, while maintaining the highest quality of accounts receivable within the corporation's capacity for risk.
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.
To maintain customer goodwill during the collection process.
To keep Sales and senior management informed about emerging problems including uncollectible accounts and order holds.
Section 2: Credit Department Goals
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 organization, support sales objectives, and change based on the general economic situation and the financial requirements of the company.
Any targets selected should be based on industry benchmarks, where possible, or on improving your own past results.
Some possible goals might be:
- To open XX new accounts during the course of the year.
- A target for the percentage of bad debts to sales.
- Percentage targets for acceptable account aging, i.e. % current, average days delinquent, percent over 90 days past due.
- Targets for typical receivables ratios used by your department, i.e.
- Collection Effectiveness Index (CEI), Days Sales Outstanding (DSO), percentage of sales ultimately written off, etc.
Section 3: Roles, Responsibilities and Authorization Level
This section should contain a brief description of the roles and responsibilities of each department member. You can include written job descriptions, if desired.
Sample Text
- CFO -- Ultimate authority for Credit Department; hires/fires, sets overall policy.
- Credit Director/Manager -- Reports to the CFO. Plans, organizes, leads and controls the credit function. Responsible for day-to-day management and training of the credit staff, determines procedures and rules for the entire department, authorizes credit limits over $500.00. Selects outside collection agencies and/or outsourcing firms with the approval of the CFO.
- Billing/Invoicing Manager -- Reports to the Credit Manager. Responsible for the day-to-day management and training of the personnel within the Billing Department, maintaining high standards of invoice accuracy, handling invoicing disputes, deductions and all matters pertaining to billing. Reviews the daily aging report.
- Collections Manager -- Reports to the Credit Manager. Responsible for the day-to-day management and training of the in-house collection team. Coordinates with outside collection agencies. Has input into the selection of any outside collection resources. Authorizes payment terms with the approval of the Credit Director.
- Credit Analyst -- Reports to the Credit Manager. Obtains and analyzes financials, analyzes credit reports for clients requesting credit limits of more than $500, assigns credit limits up to $250.00.
- Billing Clerk -- Reports to the Billing Manager. Responsible for preparing the invoices and ensuring that they are sent on time, maintains the aging report, provides other support services to the Billing Manager as required.
- Collection Specialist -- Reports to the Collections Manager. Contacts past due accounts per requirements. Accepts payment terms with the approval of the
- Collections Manager -- Maintains records in collection system.
Credit and Collection Assistant -- Obtains signed credit applications, reviews for completeness. Requests credit references and follows up. Pulls credit reports. Provides other support functions as needed.
Section 4: Procedures
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 enforced. The procedures should be somewhat flexible, but not so vague that they are subject to interpretation by every member of the department. Situations where flexibility is possible and the hierarchy for approval of changes should be well defined.
As with your goals, the procedures should update periodically to take advantage of best practices, technology, or anything new that can improve your processes and results.
In this section, include the processes for:
- Evaluating New Customers' Creditworthiness
Sources of information you can leverage to help determine credit risk are: industry credit groups, credit bureau reports, financial statements, credit references, public records, and information provided by applicants.
Sample Matrix
| Requested Credit Limit |
">Credit Application Completed and Signed |
">Check References |
">Obtain Credit Report |
">Initial Terms |
">Credit Limit |
">Approval |
| <$250.00 |
Yes |
Yes |
No |
Prepaid
then Net 30 |
$250.00 |
Analyst |
| $500-$2500 |
Yes |
Yes |
Basic Report |
Due on Receipt
then Net 30 |
$500-$2500 |
Credit Manager |
| >$2500 |
Yes w/signed personal guarantee & financials |
Yes |
Full Report |
50% on 1st order then Net 30 |
???? |
Credit Manaager |
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".)
- 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.
- Terms and Conditions of Sale
Your terms and conditions of sale protect your rights as a seller. They 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")
- 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.
- 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 Oldest Invoice Date |
">Portfolio A
$5000+ |
">Portfolio B
$2500-$5000 |
">Portfolio C
$500-$2500 |
">Portfolio D
<$500 |
| 0-20 days |
Current |
Current |
Current |
Current |
| 20-30 days |
Current-F/U Call |
Current-F/U Call |
Current-F/U Ltr/Email |
|
| 37-40 days |
In-House F/U Call |
In-House F/U Call |
F/U Collection Ltr/Email |
F/U Collection Ltr/Email |
| 45-50 days |
In-House Collection Call #1 |
In-House Collection Call #1 |
In-House Collection Call #1 |
In-House Collection Ltr #1 |
| 55-60 days |
Escalation to Collections Mgr-collection call; credit hold |
In-House Collection Call #2 |
In-House Collection Call #2 |
In-House Collection Ltr #2 |
| 65-70 days |
Review by Credit Mgr-Final Demand Call |
Escalation to Collection Mgr; Final Demand Call; credit hold |
In-House Final Demand Call; credit hold |
Final Demand Letter; credit hold |
| 75-90 days |
To 3rd-party agency |
Review by Credit Mgr; to agency |
to 3rd-party agency |
to 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 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:
- The policy must be a living document, routinely updated in response to the changing economy, market conditions, and the competitive environment.
- It must be applicable to all of your customers, with limited exceptions.
- It must incorporate the needs and help to accomplish the goals of management, finance and sales.
Loral A. Narayanan, is Marketing Manager, ABC-Amega Inc.
*****
We thank ABC-Amega Inc. for the above information, which was originally published in their client newsletter "Credit-to-Cash Advisor". ABC-Amega Inc. provides 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.
| |
Webinars