Collection System Development
Your Credit Policy – How and Why to Write It
Let’s begin with defininging accounts receivable management. Here is our definition; accounts receivable management begins with the simple but time consuming process of tracking your customers’ ability and willingness to pay, and ends with your ability and willingness to ask for what is owed to you. We mention your ability and willingness to ask because both are important to your ultimate success. You may believe you’re willing, but if you find yourself avoiding the work we’re going to discuss in these tutorials consider revisiting the question.
We believe every small business should have a credit manual. Like any other area of your business you will benefit from systemitizing how you handle the extension of credit and the collection of past due accounts. Your credit policy is the core of your credit manual, so let’s start there.
What’s your Objective?
It’s important when writing your credit policy to keep your objective in mind. What exactly are you trying to accomplish? We believe the objective of a well written collection policy is to protect your accounts receivable, while supporting the growth of your company.
In other words, we don’t want to lose money by extending credit to businesses that may not be able to pay, but at the same time we don’t want to squash sales with overly aggressive, or unnecessary credit requirements.
You might for example make a strategic decision to extend credit terms for a particular client, or a particular type of client in order to win a job from a competitor or to close a big order. Your credit policy should provide you with guidelines designed to protect you from yourself and your salespeople when you’re in the middle of this exciting process.
5 Must Have’s for Your Credit Policy
1. Bad Debt Tolerance: You need to decide how much bad debt you’re willing or able to tolerate. Remember, bad debt is a cost of doing business, not a failure on the part of your credit department.
If your level of bad debt is very low or non-existent you are probably losing sales unnecessarily, you might be ok with this, it’s a personal and business decision. We’re suggesting however that you make this decision in advance. If your bad debt is too high, obviously you need to tighten things up.
To determine what is too high or too low begin by examining your industry standards and adjust based on your personal risk tolerance and the ability of your company to withstand the loss. This number will generally be a percentage of annual sales.
2. Information gathering guidelines: Ok, I’m going to admit it right up front, having been a credit/collection professional most of my adult life, this is one my particular pet peeves. Giving a customer credit without gathering contact information - What are you thinking? Ok, I said it, please don’t do this. While it’s true not every order or customer warrants a full fledged credit check, you do need a file with basic contact and banking information on every customer. Even if you never have a collection issue you need this information for sales and marketing purposes. Develop a credit application and have every new customer fill it out. The higher the expected volume the more information you need. It’s a good idea to periodically request updated credit information on active current customers as well. Think this through and write it up.
3. Terms & Conditions: Write up your standard terms and guidelines for establishing credit limits. For example; you might decide that orders under a given $ value require no more than a confirmation that the business actually exists. Or any order over a given $ value requires a complete credit check. Decide what a thorough credit check means to your business. How many trade references, do you want personal references. Do you want a credit card on file. Do you want a personal guarantee. Get banking information. This is a must, you want not only who they bank with but which branch they bank with and an account number so you can check average balances. This will help you establish your credit lines. Make some decisions and write them down. Then decide who is responsible for approving extended terms or exceeding established credit limits. Make sure you establish and write down a protocol for handling orders that fall outside your established policies and guidelines.
to be cont…. this is a work in progress 
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