Characteristics of a Strong Customer Credit Policy - Part 1
Loosing significant money because of customer bad debt and slow pay you can kill your company. Especially in today’s shaky economy, customers who have been good payers for many years can suddenly pose a risk to you. Likewise, when you consider selling to new customers it is critical to do a complete credit investigation when the amount of desired credit you plan to extend is significant if you lost all of your at risk accounts receivable due from a new customer.
There are several key strategies to avoid customer bad debt and slow pay.
Living Document. Your written credit policy and the associated collateral should be thought of as a living document that should be reviewed and modified as warrants. It should also be available for each person in your organization responsible for a portion of it to access easily for day to day review.
Written Credit Policy. First, write a credit policy that defines how your company is going to make credit decisions, handle credit investigations, and pursue collections of past due accounts. Your company’s credit policy should include measurable goals related to extension of credit. Examples of typical goals might include: 1) Keeping annual bad debt write-off to less than X% of total sales; 2) Keeping days sales outstanding (DSO) to less than XX days; and 3) Keeping the percentage of delinquent debt owed to your company below 60 days to X%. Your goals might be different but these are several that are typical.
Your written credit policy can either be a strict document or a loosely written one. A strict document doesn’t allow for as much flexibility as a loosely written one, but does make it very clear who has what authority and very clearly outlines processes. I prefer a credit policy that is less strict, yet still gives various parties involved in the credit making decisions for your company reasonable guidance. A flexible policy may allow a credit manager to use their own discretion over certain aspects of the credit and collections process.
Organizational Responsibilities. Most companies have a layered set of responsibilities for those responsible for being involved in the credit evaluation and granting process. In a small to mid-sized company these would usually be: the ceo, sales manager, credit manager or A/R manager, and CFO or bookkeeper. Your credit policy should outline how each party in the process is expected to contribute as well as their responsibilities and duties. If you decide to grant credit making authority to each person, the dollar limit of authority should be clearly outlined. Additionally, provisions are often made for decision making in the absence of one of the members of the credit team.
Credit Application. It is often a good idea to review and potentially review your company credit application and bank and trade reference form when you write your credit policy. Like the credit policy, your credit application should reflect the needs of your company and industry. When designing your credit policy you should think about the various ways you may use it. First, to provide information that will allow you to easily find credit records in the various business credit bureaus. Second, your credit application should contain information necessary to properly allow you to identify your customer, its owners and any information necessary to take legal action if necessary.
Bank Reference Form. An often overlooked part of a credit application is the bank reference sheet. This sheet has a small amount of information completed by your customer and is signed by an officer that handles banking matters. The kind of information you need on this form includes bank, account number, contact name of bank officer, and types of accounts with the bank. The bank reference form is faxed to the potential customers bank where their bank officer or credit department complete it providing you such information as average relative account and loan balances, age of banking relationship, number of NSF checks written in past year, and most importantly it should indicate whether the customer is in good standing or not.
Trade Credit Information. A complete credit investigation should include a trade credit reference form similar to the bank reference form. Ideally your potential customer should give you trade credit references in an industry similar to yours. If you are a distributor of fasteners for example, you should ask for trade references of other companies that sell similar or complementary goods to your customer. Getting a trade reference from your customer’s utility provider is not as good as a true trade vendor.
In the next post I will discuss the various aspects of evaluating credit and obtaining credit information from commercial business credit bureaus.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
Sam’s direct email: sam@lesliethacker.com
Twitter: @SMBFinance
There are several key strategies to avoid customer bad debt and slow pay.
Living Document. Your written credit policy and the associated collateral should be thought of as a living document that should be reviewed and modified as warrants. It should also be available for each person in your organization responsible for a portion of it to access easily for day to day review.
Written Credit Policy. First, write a credit policy that defines how your company is going to make credit decisions, handle credit investigations, and pursue collections of past due accounts. Your company’s credit policy should include measurable goals related to extension of credit. Examples of typical goals might include: 1) Keeping annual bad debt write-off to less than X% of total sales; 2) Keeping days sales outstanding (DSO) to less than XX days; and 3) Keeping the percentage of delinquent debt owed to your company below 60 days to X%. Your goals might be different but these are several that are typical.
Your written credit policy can either be a strict document or a loosely written one. A strict document doesn’t allow for as much flexibility as a loosely written one, but does make it very clear who has what authority and very clearly outlines processes. I prefer a credit policy that is less strict, yet still gives various parties involved in the credit making decisions for your company reasonable guidance. A flexible policy may allow a credit manager to use their own discretion over certain aspects of the credit and collections process.
Organizational Responsibilities. Most companies have a layered set of responsibilities for those responsible for being involved in the credit evaluation and granting process. In a small to mid-sized company these would usually be: the ceo, sales manager, credit manager or A/R manager, and CFO or bookkeeper. Your credit policy should outline how each party in the process is expected to contribute as well as their responsibilities and duties. If you decide to grant credit making authority to each person, the dollar limit of authority should be clearly outlined. Additionally, provisions are often made for decision making in the absence of one of the members of the credit team.
Credit Application. It is often a good idea to review and potentially review your company credit application and bank and trade reference form when you write your credit policy. Like the credit policy, your credit application should reflect the needs of your company and industry. When designing your credit policy you should think about the various ways you may use it. First, to provide information that will allow you to easily find credit records in the various business credit bureaus. Second, your credit application should contain information necessary to properly allow you to identify your customer, its owners and any information necessary to take legal action if necessary.
Bank Reference Form. An often overlooked part of a credit application is the bank reference sheet. This sheet has a small amount of information completed by your customer and is signed by an officer that handles banking matters. The kind of information you need on this form includes bank, account number, contact name of bank officer, and types of accounts with the bank. The bank reference form is faxed to the potential customers bank where their bank officer or credit department complete it providing you such information as average relative account and loan balances, age of banking relationship, number of NSF checks written in past year, and most importantly it should indicate whether the customer is in good standing or not.
Trade Credit Information. A complete credit investigation should include a trade credit reference form similar to the bank reference form. Ideally your potential customer should give you trade credit references in an industry similar to yours. If you are a distributor of fasteners for example, you should ask for trade references of other companies that sell similar or complementary goods to your customer. Getting a trade reference from your customer’s utility provider is not as good as a true trade vendor.
In the next post I will discuss the various aspects of evaluating credit and obtaining credit information from commercial business credit bureaus.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
Sam’s direct email: sam@lesliethacker.com
Twitter: @SMBFinance
