There are numerous sophisticated accounting software systems on the market that make the process of tracking customer accounts relatively simple. They can be expensive or affordable, specific to a particular type of business or not, and suitable for small businesses or large ones, but in any and every case they need to be underpinned by the simplest and cheapest of all credit systems - a written Credit Policy.
Anatomy of a Credit Policy
A good Credit Policy should cover every possible eventuality in detail, and define the role of senior management and limit the authority of other company personnel by setting out exactly who is responsible for doing what, when, and how.
For example, a Credit Policy might begin by stipulating that new accounts should always be submitted to the Credit Manager/Controller BEFORE the commencement of trading, and then go on to specify what the Credit Manager/Controller should do to activate a credit investigation - provide the prospective customer with basic credit documentation for completion and return; take up references; obtain Company Searches in respect of limited companies; request a Credit Report from a Licensed Credit Agency, a search of the Electoral Roll, and a search of the Register of Judgments, Orders and Fines, and enter all the data correctly.
It would then go on to deal with setting initial credit limits for the new customer, and stipulate that those limits should be based on the Credit Manager/Controller's credit investigation and set by mutual agreement between, say, the Credit Manager/Controller and the Finance Director or Company Secretary.
You will have noted that the first clause of our example insists that new accounts should be submitted to the Credit Manager/Controller BEFORE the commencement of training. Initial orders from new customers should now only be supplied on a 'cash on delivery' or received funds basis. It is more important than ever to ensure that a potential customer is credit-worthy before giving credit - and that the customer is not looking for a new supplier only because it has exhausted its credit elsewhere!
Essential Points to Cover
A Credit Policy should set out:
Who is to identify customers who are likely to exceed, or have already exceeded their credit limit, and the procedure to be followed where that is the case.
Who is to set credit limits above those authorised by the credit investigation.
Who is to authorise the amendment or variation of Terms & Conditions.
Who is to be responsible for sending out invoices and statements, making chasing telephone calls or sending reminder letters, and who is to determine whether visits to late-paying customers might be useful or appropriate.
Who is to authorise the issue of legal proceedings against defaulting customers.
Who is to negotiate and authorise the acceptance (or not) of proposed repayment plans.
Who is to make provision for bad debts.
Who is to monitor customer insolvency.
Who is to initiate a complaints procedure and handle dispute management, and to whom complaints must be reported when received.
Who is to be responsible for management reporting, and how, and when.
Who is to deal with cash and performance targeting.
It should also specify that the limits of authority set out in the document must be followed and obeyed in all cases. It is very important to ensure that a Credit Policy applies to ALL personnel and that ALL personnel are made aware of it and abide by its terms. A credit department cannot function in a void; it must interact appropriately with other departments and with senior management, and they in turn must interact appropriately with it and fully appreciate its important, its concerns, its purpose, and take its opinions into account. A company's sales force, for example, is a valuable source of intelligence. Sales representatives are in a position to gather information about customers that would not be available from any other source. It is therefore obviously important that that information be shared appropriately.
What We Can Do to Help
Many companies do not have a written Credit Policy, or do not strictly adhere to the Policy they have. Losses inevitably ensue. Only a credit system that is underpinned by a written Credit Policy that is strictly adhered to by ALL company personnel can ensure that payment for goods or services is received on time, and enable credit staff to spot potential problems before it is too late.
We can advise upon and prepare a credit system to suit your needs, provide a tailor-made Credit Policy, and train your credit personnel and your sales force to use it in your company's best interests. Please contact us for more information about credit systems, and an estimate of our fees.
