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Overview of Credit Policy
When do you first think of Credit Management? A lot of businesses start thinking of Credit Management when their customers stop paying! When the customer stops paying this is called Debt Management. So, what's the difference!
Credit Management, in broad but essential terms, is sound sales, backed by effective and efficient revenue collection resulting in profitable sales.
Credit Management, in more detail, starts with a reliable Credit Policy. A Credit Policy should outline your company's strategic and operational requirements from credit sales. It is not sufficient to provide credit to your customers "because everyone else gives credit". You need to evaluate what your company needs from your credit sales i.e.
INCREASED SALES
IMPROVED PROFITABILITY
NEW CUSTOMERS
INCREASED MARKET SHARE
You can see that all of the above are driven with the aim of producing profitable growth, and not as a service to be abused by customers. So, you have decided why you want to offer credit to our customers (the strategy) now we have to implement systems, procedures, limits, authorities and train personnel (operational) in the following areas:
TRADING TERMS
VETTING CONTROLS
CREDIT SUPPLY LIMITS
INVOICE MANAGEMENT CONTROL SOFTWARE
Some of you with the smaller, small business are probably thinking that you do not need to implement much of the above as you deal in small numbers. The facts are the smaller your business the more likely you are to suffer a bad debt. The reasons:
The larger companies have the ‘better’ customers.
The larger companies can choose their debtors.
The larger companies have more resource to vet customers.
The larger companies always vet their customers
The larger companies do not attract serial bad debtors.
The larger companies have dedicated staff to deal with debtors…
I am sure you could now add more to the above list. The situation for the small business looks precarious: and it is! The sooner ‘large company’ credit policy procedures are adopted the sooner you will have increased control of your company’s future. You must never feel that by insisting on every credit customer to follow your credit procedure that you are ‘over doing it’ or that you risk loosing the sale through being ‘too careful’. Your trading terms say as much about your company’s unwillingness to suffer professional debtors as you could say in a thousand words.
Do you include a 'Reservation of Title' clause in your trading terms. Do you also clearly state when payment is due? Do you state that you will charge interest on outstanding invoices – you have always been able to charge interest, you did not have to wait for the 'Late Payment Bill'.
When vetting potential customers do you rely on any one piece of information: say, a credit reference report, or a bank reference, trade reference etc. If you use none of these, I suggest you do, and if you use only one, I suggest you use more. Do you ever ask for a 'director's guarantee', if they refuse, draw your conclusions. Do you provide more than two months credit to any one customer, if so, you are more likely to suffer bad debt? Some would say that it is safe to supply 10% of Net Worth or 20% of Working Capital - however, this means you must trust the published accounts!
A simple Credit Policy with manageable procedures will help build your business on minimum risk sales: these are the sales that are numerous and provide guaranteed profit levels. (working example)
BizHelp24 – UK business and finance information, news, help and services for small businesses BizHelp24 is a UK business and finance resource providing Small Business Help, Start up Information, news and services; for individuals and Sole Traders. Comprehensively covering a wide range of key business, finance, and service topics. Employment and personal information includes Work Times and Break Entitlement, Body Language, employee Holiday Entitlement and Employment Contracts. Credit Policy information includes Letter of Credit, useful Credit Notes, Business Loans. and Cash Flow Control. Other information areas include Bankruptcy, Homeworking, Business Failure, Company House and Company Names,
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