A Guide to Creating a Credit Policy

Elaine FryElaine Fry

Gateway Credit CongressGateway Credit CongressSeptember 18, 2007September 18, 2007

Developing a Policy

• What is our mission?• What is our goal?• Who has specific credit responsibility?• How will credit be evaluated?• How will exceptions be dealt with?• How is collection handled?• What are our terms of sale?• Other considerations

Hurdles

Example Mission Statements

• The Credit Department is responsible for maintaining a high quality of accounts receivable while selling to customers that represent prudent credit risks.

• It is our policy to provide credit terms to all potential applicants, regardless of payment history. The Credit Department will attempt to screen out customers that represent a significant risk and extend open terms to all others.

To maximize the protection of accounts receivable while

supporting the organization’s efforts to expand sales and

increase market share throughout the world, to evaluate accounts receivable worldwide risk and to

make sure the appropriate reserves are in place.

-Microsoft’s mission of credit

General Statement Approach

• It shall be the duty of the Credit Department to build broad and durable customer relationships for the growth of the Corporation. In performing this duty, the Credit Department shall maintain a positive and constructive attitude towards its customers both internal and external. Further, the Credit Department shall maintain a cooperative attitude with Sales and endeavor to promote rather than retard sales. Within the bounds of sound credit practices, the Credit Department shall endeavor to find a suitable credit basis on which to sell new customers. The Credit Department shall have the responsibility of establishing suitable credit limits.

Goals

• Two approaches

– Numeric goals

– Generic statement

Numeric Goal

• Our goal is to limit bad debts to __% of sales, DSO to ___Days, and receivable aging to no more than __% beyond 90 days. We will visit __customers a year and review credit limits over ………………………………………………………………….

• (will need constant revision as expectations and metrics change)

Generic Goals

• The Credit Department will strive to meet metrics established by senior management relating to the Accounts Receivable.

• (will not need revision as the metrics change)

How Will Credit be Evaluated? How Will Credit be Evaluated?

How will Credit be Evaluated?

• Credit Department will establish credit limits for all active customers.

• Name the Credit resources used in establishing credit• What is credit limit authority for each practitioner?• What is the hierarchy of credit limit authority?• How often will accounts be reviewed?• What is procedure when credit worthiness changes for

better or for worse?• When can production begin?• How are disagreements handled?

How collections are handled?

• When will the customer be contacted?• How often will they be contacted• Collection letters• Notifying sales reps of non pay• Notifying sales reps of process disconnect• Go through the entire process and then

prepare a flow chart for the credit policy

How will Exceptions be dealt with?

What are our terms of sale?

Everyone needs to know when the bills are due

• What are the terms of sale• How will unearned discounts be handled• How will tax be handled • What if a customer wants extended terms?

– Who has to agree to extended terms– What is the approval procedure

Deductions and Disputes

• How are they handled

• Who handles them

• How are they reported

Other Factors

• Job descriptions including perquisites for advancement

• Credit Organizational chart

• All forms used by the Credit Department– Credit application– Collection letters– All Customer correspondences

Important Take Aways:

1.Credit policy is general course of action. 2. Involve those in the order to cash process3.Effective credit policy will balance overall

corporate goals. 4.Credit policy is a dynamic document5. Consider the drawbacks and objections6. The wide range of tasks should be covered by

the policy