Throughout our blog posts, we’ve always stressed the importance of having a business credit policy and keeping it up to date. But what is the goal of a business credit policy? How do you make sure it is effective? Your credit and collections policy can be as in-depth or as brief as you would like, but keep in mind that even the most basic policy should help a company answer the following questions.
WHAT IS THE PURPOSE OF A POLICY?
The first step in creating a business credit policy is deciding what you’re trying to accomplish. This document can be simple or complex, it can be used to train new employees, as well as current employees in both sales and accounting. Once you have figured out what your credit policy is going to do for you, you can decide how in-depth you will take it. No matter what you decide, just make sure it’s impactful, always up to date, and helps you reach departmental goals.
WHAT ARE THE GOALS OF THE CREDIT DEPARTMENT?
A mission statement will define the purpose of the credit department and provide a general, long-term focus for the department as a whole. Be sure this statement aligns with the corporate mission, is specific to your industry, and has input from upper management as well as the sales and finance departments.
HOW WILL THOSE GOALS BE MEASURED?
What is the objective of the credit department? What is the long-term goal and what are the short-term goals that will help you work toward it? Be sure these goals are measurable and research your industry’s averages to ensure your goals are on target with your specific industry. This will also help you benchmark and compare yourself to your competition. Some examples might be:
- To have a collection effectiveness index of X%
- Average days sales outstanding to be X days
- A bad debt write-off of X%
WHO IS RESPONSIBLE FOR WHAT?
In this section, you will describe the different roles of the department, who reports to whom, and who is responsible for what. Some of the roles you will want to define include:
- CFO
- Credit manager
- Invoicing manager
- Credit analyst
- Billing clerk
- Collection specialist
- Collections manager
WHAT IS THE PROCESS?
This is the real meat of creating a credit policy. Here you will define the rules that apply to all customers (with as few exceptions as possible) to guide your sales and credit department. You want these rules to be flexible but not vague or open to interpretation. Some of the procedures you will want to define and explain include:
- Evaluating the creditworthiness of new customers and reevaluating that of current customers
- Terms and Conditions of Sale
- Invoicing
- Collections procedures
- Disputes procedures
- Credit holds
- Payment plans
- Write-offs
- Third-party collections
- Lawsuits
- Define the collection process
HOW WILL YOU MEASURE RESULTS?
It is important to measure the effectiveness of your credit department regularly; at least once every quarter. The metrics would align with the goals you set in section two. So, if your goal was to reduce DSO by X% how close are you to that percent? What can you do to get there? Your business credit collections policy should be a living document, if you find you are struggling to meet your goals, you may find that you need to make some changes to your collections department.
As you work through to build each section of your policy be sure to answer the above questions to help guide your sales and collections department.
