Should Your Company Establish A Credit Policy?


Aug 18, 2014

A corporate credit manager once said that even though it is the sales department that goes out and makes the sales, no sale is complete until the invoice is collected and the money is in the bank.

The point is well taken. If your company sells on credit, you haven’t earned a cent until the invoice is paid. Yes, it may be exciting to land a million dollar customer — but if that customer can’t pay you he will end up costing your company money.

That brings up the subject of credit policies. Should your company to establish a credit policy?

Most successful companies have credit policies with checks and balances in place to make sure the policies are followed. But why do they establish credit policies?

The main reason is to take the emotion out of granting credit. It shouldn’t matter if a salesman comes in and declares “This customer is a great guy! Why, his family is worth millions. They own half of Minnesota!” If the customer doesn’t meet the company’s credit criteria, credit should not be extended.

What are some things that go into a good credit policy? Here are some suggestions gleaned from a number of profitable companies.

Credit decisions should be made only by the credit department and each member of the credit department should be trained in credit evaluation. Limits of credit granting authority should be assigned to each member of the department.

Exceptions to any credit policy should be made only by the credit manager and only up to his or her established limit. After that they should be referred to the CFO — not the VP of Sales!

Credit limits for each customer should be established using specific criteria. Criteria may include the number of years in business, net worth, liquidity, leverage, and past payment record with other vendors.

Credit limits should be established by the credit manager up to his or her level of authority. Credit lines in excess of that authority should be referred to the CFO, or someone he or she designates. In some instances large deals may even have to be referred to the board of directors before approval is granted.

Under no circumstances should members of the sales team be authorized to grant credit. Sales reps should not allowed to assure customers credit will be granted. Customers should be advised all credit decisions will be confidentially by the credit department.

Good credit policies should not hurt a company’s sales. On the contrary, a company with healthy profits will have a workable credit policy in effect to complement its sales.

Should your company establish a credit policy? Too many companies end up having serious financial problems when they extend too much credit to the wrong customers. A workable credit policy is the best way to prevent that from happening.

Remember, no sale is complete until the invoice is collected and the money is in the bank. A good company credit policy is the best way to make sure that happens!

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