So, What do you say when someone asks, "Why do we need a formal credit policy?"
Many companies lack a formal credit policy, or the current policy has not kept up with today's dynamic business environment. It is essential for any company to have a coherent, well-thought-out credit policy addressing the company's financial and competitive needs. Credit policies set the "rules of the road" on how a company reviews the creditworthiness of its' customers and decides if, or how much credit to extend.
The Credit Policy
1. Creates consistency in credit-related decisions. You'll no longer have subjectivity creep in, irrespective of which one of your credit analysts take the decision
2. Provides an outline of requirements to remain in legal compliance. Your company's compliance with key regulatory requirements such as those covering anti-trust, credit approvals and denials, the handling of personal information, collection practices, and SOX.
3. Documents your company's “Mission Statement, addressing the company's customer care, financial and competitive goals." Your credit policy is your tool to align your department to the company's goals.
4. Communicates the critical importance of accounts receivable management to the company's sustainability. You'll be able to speak in the language of senior finance leaders as they are on the lookout to improve cash flows and net profit margins.
To make your policy effective, consider the following:
1. The objective of the credit policy must always be to maximize profitable revenue, with terms that facilitate the likelihood of customers paying as agreed.
2. Making a policy work requires cross-functional collaboration with your sales teams, warehousing and logistics team, and all other stakeholders. More importantly, the final draft of the credit policy should have the buy-in of the senior management of all these functions.
3. Formalizing your company's credit policy can be a daunting task. This is a full-fledged project that needs 6-Sigma type execution and can be very time-consuming. To start create a detailed project plan with a calendar of essentials, and reasonable milestones to create a policy document that is in line with your company's revenue and financial objectives, and strategies.
Then the next time someone asks how you arrive at a credit decision you can tell them. “We have a well-thought-out credit policy. This document outlines our strategy to reduce risks and fund ways to grow our company's revenue. In short, this document is the custodian of keeping our company in compliance with legal requirements, and for well thought out credit decisions.”
Looking to create a credit policy or update an existing one? Here's an online course that'll help you get started.
