Understanding the Importance of Credit Policies in Business Operations
A credit policy/manual serves as a comprehensive guide detailing rules, regulations, and procedures within a company. It helps new employees understand the company's credit processes and establishes clear guidelines for decision-making. Without a credit policy, conflicts may arise in approving credit applications. This article highlights the significance of having a well-defined credit policy and outlines the requirements and steps to initiate one effectively.
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Credit Policy and Procedures DeLinda Goodman, CCE January 19, 2017
What is a Credit Policy/Manual? A Credit Policy serves multiple purposes It acquaints new employees with the details, rules, regulations, and policies of the company Represents and authoritative reference for all of the individuals covered by the written plan An explanation of procedures Do not confuse a credit policy with a procedure manual A credit policy sets out specific guidelines, while a procedure manual gives a detailed description of tasks to be completed to accomplish the goals established within the company s credit policy
Why is a Credit Policy Important? The AR portfolio is generally one of the largest assets a company owns Without the support of a credit policy, individuals will be unsure of their authority to make decisions A credit policy should be written in such a way that there will be a day to day establishment of rules Avoids conflicts in the decision making process of approving credit Clearly states who can make decisions
Requirements of a Credit Policy Follows goals and requirements of the company Be certain that company goals and objectives are clearly defined before the policy is written Is the company in Growth Mode? Is Preservation more important? If rules are vague, set the standards based on historical data or industry standards Expect that the goals may be changed or adjusted
How to Start What is the Purpose? minimize losses on trade receivables, optimize net working capital, and ensure a standardized process is in place to establish lines of credit and to collect past due balances Scope All credit approvals Sold 100% to those who will be affected by the decisions Credit Team Management of the Company Sales Operations Everything fully explained nothing left to interpretation Responsibilities outlined in the order tasks are to be completed Living document should be reviewed periodically for additions or amendments
Down in the Details New Customer and Credit Establishment Each new account application should be signed by the customer, and Credit Application should clearly state terms and conditions Variety of ways to determine when and how to extend credit Recommended to use some form of credit scoring Based upon combinations of customer s financial strengths Determined by ratios or payment habits over the past 1-2 years Credit references from other vendors or bank Credit Review and Investigation May use outside credit reporting agencies Approval hierarchy for credit limits is advisable
More Details Credit Holds and Releases most computer systems will automatically put orders on hold if certain parameters are met What parameters require a credit release? Can the parameters be changed, or should they? Specify who is responsible for review and release Communication flow to affected parties
More Details Collection of Past Dues every effort will be made to collect monies owed upon completion of sale Payment Terms clearly communicated to customers Who is responsible for performing collection activity? Method(s) of collection When is account put on Credit Hold? Resolution of Disputes in some cases, customers will withhold payment of an invoice because they are disputing part or all of the invoice Specify how disputes will be tracked Who is responsible for working towards resolution
Attachments to the Policy Exhibits/Attachments several items should be attached to the Credit Policy to clearly state what forms, etc. are applicable New Customer Load form, if applicable (for cash accounts) Credit Application Credit Award letter example Credit Denial letter example
