By Dean Kaplan+
This article is part three in a three part series about written credit policies and how they can positively affect in-house debt collections. The first article discussed the benefits of a written credit policy. The first article deals with how credit policies affect operations and debt collections.
The goal of every in-house debt collection department is successful accounts receivable collections. This article is part three in a three part series detailing the benefits of and strategies for developing a written credit policy for your company. This article will specifically deal with the writing of your credit policy. If you missed the first article and would like to read it, use this link A Written Credit Policy Can Lead To Debt Collection Success.
There are many ways to write a credit policy. This article will provide you with questions you must answer to build the framework of your credit policy. It will be up to you and your company’s management to fill in all the details necessary to tailor your credit policy to exactly fit the culture and needs of your organization. Remember, for any credit policy to be implemented successfully, management buy-in is critical. Therefore, the credit policy has to identify advantages that it will provide to the entire organization. If these advantages are obvious, implementation and enforcement of the credit policy will be much easier.
The first and most important step in developing your credit policy is to define the mission of the company. Once this mission is defined, then each department should come up with its own mission which will promote and support the company’s mission. For example, if the company mission is to maintain market share while optimizing cash flow, then the goal of the debt collection department might be to prudently extend credit to existing and new customers in order to maintain a low debt collection volume. In other words, the customer base should primarily be made up of good paying customers.
Now that each department has its own mission which is consistent with the company’s overall mission, the company must set goals to achieve the mission. Goals can be specific numerical goals such as limiting bad debt to x% of sales. Another approach is to write a more generic statement on each goal area. The advantage of the more general approach is that company goals change frequently; however, you do not want to have to constantly revise your credit policy. The important thing is to set measurable company goals. If they are not specified in your credit policy, send them out to the entire organization in a separate document so that expectations are understood by all. Specific department goals can then be defined which should tie into the company’s overall goals.
The next element in your credit policy is a clear definition of who has specific credit responsibilities. Every person who is involved in credit at your company must be identified and his or her role and authority level determined. This is important because it will limit duplication of effort and power struggles across departments. A questionnaire sent out to all departments asking questions relating to credit will enable you to define these employees and their roles. Take the time to really understand the inner workings of credit within your company, and you will be surprised by how many new efficiencies you might discover.
Now it is time to define how credit will be evaluated. This section of your credit policy will require a varying degree of detail depending on the specifics of your company. A large company might keep this section relatively general. A smaller company might provide more details. Either way, a detailed procedure needs to be developed which provides a foundation for all future credit decisions and a way to re-evaluate current customers’ credit, if necessary. The goal is to treat all customers equally when it comes to credit decisions. Development of a detailed procedure will make this a reality.
The next section of your credit policy will define how debt collections will be handled. This issue is at the center of any credit policy, and it will determine the major activities performed by your debt collection department or in some cases another operational department, if debt collections are performed by other employees such as sales representatives. The first step in this area is to define what is currently being done at your company, and then decide if this is the best way to move forward. Make sure your credit policy defines debt collections the way you want them to be handled going into the future.
The final area to define in your credit policy is what your company’s terms of sales are. There should be no confusion about when your customers are expected to pay their bills. Clearly define this in your credit policy, even if there are different terms relating to different products. Being specific in this area will eliminate lots of headaches later.
Now you have the basic framework to finalize your written credit policy. Obviously, there are many other details which can be included in your credit policy. This article has not attempted to define all of these; however, if you include the items identified in this article in your credit policy, you will have a solid beginning. A credit policy is not a static document. Be sure to review it from time to time to make sure it is still applicable to your company at any given point in time.
The Kaplan Group is a boutique collection agency specializing in large (over $10,000) debt collections due from businesses. Founded in 1991, the company has a stellar reputation (A+ rating with the Better Business Bureau) and is recognized as one of the leading collection agencies for results on large and complex matters.