A credit and collections policy is a document that includes “clear, written guidelines that set the terms and conditions for supplying goods on credit, customer qualification criteria, procedure for making collections, and steps to be taken in case of customer delinquency”.
In fewer words, it is a guide offering an organized and repeatable philosophy on selling on the rules, regulations and credit and collections procedures to manage daily operations. The goal for a credit collections plan is to clearly define these elements so that sales and collections employees conform to documented steps and procedures designed to optimize your resources, reduce credit risk, and improve overall cash flow.
WHY IS IT IMPORTANT TO HAVE A CREDIT COLLECTIONS POLICY AND PROCEDURES IN PLACE?
Along with cash and inventory, accounts receivable is one of the most important short-term assets a company has. The more predictably and effectively you can convert your A/R, the healthier your cash flow will be. One of the most important factors in effectively collecting the money owed to you is through consistency. By having a formalized plan that your employees follow and by documenting all steps and communications along the way, you’re team will be much more consistent, effective, and efficient in collecting outstanding A/R.
A well written and comprehensive credit collection policy will:
- Ensure continuity in the department in the event that key personnel leave the credit department.
- Help make sure all customers are treated fairly.
- Ensure consistent credit decisions are being made.
- Be used as a training tool for new sales associates and the credit and collections team.
- Be used to ensure consistency of procedure and execution between the credit department, sales, and management.
Your policy can be as general or as specific as you would like, just keep in mind that in order to protect your cash flow, arming your employees with knowledge and predefined A/R best practices and procedures is best so they always know what to do in certain situations and can react quickly and confidently to resolve any problems or answer any questions.
KEEPING YOUR CREDIT COLLECTIONS POLICY AND PROCEDURES UP TO DATE
Once you’ve developed your collections policy, it is important to update it regularly and make sure it is still relevant and effective. It is recommended that this be done once every year, but a recent survey from Credit Today revealed that nearly 50% of companies are reviewing their policy far less frequently. Some of the major points from the study include:
- 19% said they review and adjust their policy every 2 years.
- 13% said they review and adjust their policy every 3 years.
- 15% reported they only review and adjust their policy when they need to.
- 12% said “other” which really makes you wonder the last update took place.
- SMB businesses are by far the worst offenders of neglect when it comes to their collections policy, and these are the companies who should be the most invested in formulating an A/R strategy that brings in the cash flow they need to grow their businesses.