One of the first questions I ask on a training course is “do you have a written credit policy?” and I have stopped getting upset when most of the time the answer I get is no, or sometimes I get an answer I consider even worse… “I think we have a credit policy somewhere” – No you don’t! if it is filed away or currently being used to keep a door open somewhere, that is not a policy.
Your policy should be a living, breathing document that everybody knows about and everybody lives by and everyone takes seriously. It sets out the rules around granting credit, the times you will not extend credit, the communications that must happen to ensure every new customer is welcomed into the family of happy customers you already have.
Your policy should give some guidelines on when to extend credit, to whom, how much and how long you are prepared to extend credit to them. You should include an authority schedule that sets out who can sign off what, balancing control with delegation. Setting the limits too small means management time is spent reviewing minor issues, setting the limits too high could result in a lack of control. You should set out the authority limits for your company what level of credit can be granted by a credit controller, a credit manager, at what point should it be signed off by a director? A similar schedule should be drawn up for Credit Notes, Journal Entries, Credit Line reviews and setting new lines of credit.
The document should be a central part of the induction of every member of staff and before the policy is handed over it should be preceded with the words “this is how we do business” This document should be given in particular to the sales people but equally to the marketing, the distribution, in fact anyone who interacts directly with your customers.
I know we all have urgent and important things to do every day and often never have the time to spend on such a document and I understand that, I still think it is so important that if you don’t have enough time yourself get someone else to write it for you, someone internally or externally.
Be careful you end up with a balanced document that balances risk and sales and controls with common sense. Get it signed by the Managing Director so it becomes law. Implement your policy strictly and it might sound like a contradiction but review the policy regularly – even include a section on how exceptions should be managed, because you and I both know that even though we don’t live in a perfect world, we have to be strict enough to be efficient and flexible enough to be profitable, and know when it is better for the company to take on a customer and when it is better to walk away.
This is the level of intelligence that must be provided by the credit team and in particular the credit manager.