The point of a credit policy is to protect your cash flow without impeding your ability to compete. Simple as that. That's the essence of credit management. Here are ten factors to consider when setting up or updating your credit policy:

1. Market position. There are leaders and followers. Know your spot. If you are a leader, you can ask more from your customers in terms of credit. You can also be more particular about customers. If you're new to the industry or a small company, you may need to be more lenient. You might offer competitive terms or sell to marginal accounts to increase sales.

    

2. Customer type. If your customers are usually short on funds, do seasonal work, or have other problems that limit them financially it is unrealistic to have a restrictive credit policy.

    

3. Merchandise type. If merchandise is a stock item and can be repossessed, you can have a more liberal credit policy. Raw steel, yard goods, etc., can all be returned and restocked. However, fabric cut for a specific project or steel fabricated to a specific spec has less reclamation value, and needs a stricter policy.

    

4. Margins. If you sell several types of products, margins can be a tricky element. Products with low margins require stricter credit policies to protect profits. Items with high margins may entice you to sell to more marginal customers. To set the appropriate credit policy, you should base it on the overall total margin on all products.

    

5. Pricing. Big-ticket items usually require more protection than lower priced items.

    

6. Product availability. If you have a limited amount of product to sell, your credit policy should protect profits closely. However, you should be more flexible if your shelves are overstocked or you need to move discontinued product. A clothing wholesaler with an overstock of last year's styles would probably love to sell the whole lot on special extended terms.

    

7. Location. If you distribute goods nationwide or worldwide, your credit policy will probably need in-depth, extensive credit analysis and firm collection practices. On the other hand, if you sell only to local companies, you may be less concerned with analysis and have less worries in the collection area.

    

8. Financial strength. If your company is cash poor, your credit policy will need to hold strict control over cash flow (on the basis that you can't afford to lose). If your cash flow is steady, you can afford to carry more past-due accounts.

    

9. Economic trends. When times are good, customers can pay more quickly, so you may welcome marginal accounts. In bad times, customers often delay payments and you'll need a stricter policy.

    

10. Government regulations. Liquor and spirit sales specify certain government regulations in terms of sale. This is true in other industries as well. Foreign governments may have restrictions on terms, etc. These regulations must be in your own credit policy.

How your industry works and how your company fits into your industry will have a large affect on your credit policy. Your policy should keep you competitive while avoiding unnecessary loss.