Risk of Not Having a Credit Policy
Today’s business owners and C-level financial executives are concentrating on two themes: Margin and Risk Mitigation. When properly managed, these key business metrics provide greater profitability to the shareholders of the business. Increased profitability enables business to re-invest profits and/or shareholders to spend more money, both of which are core fundamentals of a strong economy.
One area that is often under-valued, until it’s too late, is the investment in the development of trained credit staff, coupled with development of a credit policy that is unique to your business. Allowing your customers to purchase goods or services and pay for them later or overtime, gives you access to sales that you wouldn’t normally have. A sound credit policy and trained receivable management team, can greatly enhance both margin and reduce bad debt. If left unmanaged or strictly left to sales staff, it may expose your company to serious, even fatal consequences.
Credit policy development must consider and involve every component of the business chassis: Business Development, Order Fulfillment, Information Technology, Finance, and Delivery. Omission of any one of these components can lead to a dysfunctional organization.
There is no sense allowing your sales staff to invest valuable time and resources to pursue a potential customer only to learn that their prospect’s credit is so bad his own family wouldn’t lend him money. Yet this scenario is allowed to play out time and time again throughout the country. Credit policy must involve sales and marketing executives to help them determine where to best allocate their resources to obtain the best possible customers.
Incorrect order fulfillment can create unnecessary delays in your company’s cash flow. Customers will use these mistakes as an excuse to hold payment for your product or service. Even worse, your staff may have to visit the work site several times to correct deficiencies, further eroding profitability. A credit policy would deal with these issues by ensuring the Terms and Conditions of your customer credit applications or agreement cover these potential issues through project finance draws and hold-backs.
Credit policy, as it relates to your I.T department, should consider everything from correct pricing, to creation of invoicing and messaging on your invoices. Simple things like the omission of your companies interest charged on past due invoices will preclude you from collecting interest later on. And of course, incorrect pricing just creates more excuses to delay payment until you can provide your customer with a corrected invoice.
Credit policy should touch upon many areas of your companies Finance department: Reminder letters, when to call customer, what to say to the customer, frequency of follow-up, early pay and cash discounts all impact margin and cash flow.
Timely delivery of your product or service impacts everyone. If you’re a critical supplier, a late or damaged shipment may give rise to cash flow issues for both you and your customer. Credit policy that deals with back orders, short or damaged shipments and proofs of delivery all have negative consequences to your business.
While a well-constructed credit policy can’t cover every contingency, its development will get your whole team thinking about how risk management, profitability/margin, and how their own personal involvement; can significantly influence the fortunes of their employer and staffs continued employment.