What is Credit Management?

The function of Credit Management is often understood to be the internal collection of outstanding monies. If you ask sales employees they may also refer to customer order prevention. Essentially the description of Credit Management is the process for obtaining payment from customers. Generally paying attribute to its role in reducing the amount of capital tied up with customers.

The reality is that credit management has evolved, and in such a demanding economic climate where we see administration and pre-packs at a high with last year 2365 businesses in the UK going into administration, 600 of which were pre-packs. (Graham Report. June 2014); and with less businesses in a cash flow positive position, the requirements and demand for credit management is higher and wider spread than ever before.

Technology plays a positive role in increasing the efficiency of this function, however at the core of any effective Credit Management function is a clear, concise credit policy that includes requirements from within the function but just as importantly, cross-divisional departmental consideration.

Credit Policy Importance

It is important that a credit management policy is all encompassing. It must be written in such a way that it is black and white to those who use it for the purposes of their operation (the credit management department) but also to other departments within the organisation such as sales and customer services.

As previously stated, the most effective Credit Management function understands the requirement for effective interdepartmental relationships. These relationships should be utilised and set out within the borders of the Company credit policy. As the credit policy informs many departments it is often useful to create two documents; one brief and informative piece aimed more specifically at supporting divisions and a stage-by-stage in depth document for the Credit Management and Senior Management teams.

Objectives

Ultimately the key objectives of Credit Management across all Industries and business types are:

1. Achieve monthly target including delinquent DSO, cash collection and business specific indicators

2. To obtain payments due within agreed payment term period

3. Establish and maintain Interdepartmental relationships to support business objectives

4. Identify high risk accounts early using the process and policy established

5. Maximise profit on profitable sales

Key Policy Content

All Companies require a different credit policy. Depending on the size of the Company, the Industry in which it operates and the size of the credit management function; the credit policy may be adequately detailed on two pages or may require in-depth explanation, matrix and work-flow across 100 pages. No matter which it is, the key content below is a guide of what is best included in an effective credit policy.

Credit Assessment

Regular assessments are a valuable tool that should be utilised both before and during taking on new customers. These assessments will heavily influence the path taken when extending credit and also if done on a continual basis when limits are changed. Assessments carried out regularly also help to identify when a safe customer turns high risk, the regularity of these checks should be pre-determined and included in the Credit Policy.

Granting Credit-line and Limits

Be specific but exercise common sense. Having a credit matrix as a guide is essential, establishing the relevant perimeters specific to the Company will take making decisions on credit limits a long way, however, it is important to exercise common sense with more experienced team members, ideally outlined in an authority matrix; analysing accounts for an accurate and responsible decision.

Accepting and suspending orders using credit should be detailed within the policy including which credentials and key indicators are required to suspend orders. This area should also refer to the hierarchy of authority which may not exist solely within the Credit Management Team but be extended to supporting functions within the senior management team; ensuring high-level decisions are business driven.

Withdrawing or declining to extend credit to existing or potential customers is the most problematic area between sales and credit management teams. It is this area that requires explanation both within the policy and through on-going communication. It is essential that sales employees understand the process and reason for withdrawal of or declining to provide a credit facility.

Collections Procedure

The Collections Procedure should be specific to the business and potentially, different for different divisions. It is often best displayed as a work-flow diagram demonstrating all possible outcomes with actions; followed by supporting text. Through use of illustration and text all employees will be able to understand the process clearly and operate within the desired perimeters.

The supporting text of this procedure should look to address the procedure stage-by-stage (collection calls, emails both pro-active and reactive), refer to acceptable methods of payment, suspension of order / withholding goods, remittance requirement whilst referring to act or allocate and authority matrix (outlined below).

Contact information

It is often useful to supply contact information for different supporting business functions such as sales and customer services, who can more than often assist with potential bad debts and identifying high risk accounts.

Hierarchy of Authority

Levels of authority is an important element of effective Credit Management, ensuring that senior decisions are not made by unqualified employees.

This schedule should at the very least detail granting of credit limits by level, delegation to third party (debt recovery agent), collection by value and release of order by value.

Levels of authority may exist initially within the credit management function with key individuals of supporting business functions near the head of the hierarchy, as they are often the best placed other than a MD / CEO, to make business critical decisions. Dependant on the Company size and operation complexity this could be simple or very detailed.

Act or Allocate

Often the support of sales and customer services are evident when acting in-line with the credit policy. It can be useful to document an ‘act or allocate’ matrix; clearly demonstrating scenarios for which support is required from supporting functions; along with an agreed time-scale.

Payment Terms and Standard Sales Terms and Conditions

Payment terms should be clearly advised, documented with a signed agreement and communicated to the customer. No matter the size of the customer it is important that this step is taken within the initial set-up of the customer or in the event of a customer review; whether this be extending or withdrawing payment terms. There should be no casual arrangements with customers, this element should be clearly communicated to sales employees and agents to avoid later failures.

In addition to the payment terms, it is important due to the terms and conditions forming an important element of the contractual agreement between customer and supplier, to supply the customer with the Company standard terms and conditions, these should be signed by the customer and a copy returned and held on file.

Plan B – Debt Recovery

No matter how tight your credit policy and how efficiently pro-active your credit management team are every Company experiences bad debt; often without exercising a plan b the bad debt is written off. It is important to have a debt recovery agent or panel of agents that are available at whichever stage within the collection policy is appropriate and for the level of debt deemed worth-while. The truth is the key determining factors for sending out ageing debts to a recovery agent varies greatly depending on the Companies resource, Industry, the customer base and the debt itself.

With a great deal of recovery agents offering a no-recovery, no- fee premise to be contracted into such a process, there is nothing to lose when you have ensured the recovery agents selected understand your Company and it's brand; in-turn strategically aligning themselves in the way in which they recover debt. After all it's best to have 80% of something rather than 100% of nothing.

Performance

KPI’s (Key Performance Indicators) should be referred to within the credit policy with separate operational documentation that delivers the monitoring of the declared KPI’s.

KPI’s will vary from Company size and industry type but may include:

1. Days Sales Outstanding (DSO)
2. Cash Targets
3. Aged Debtor Report Analysis
4. Delinquent Days Sales Outstanding
5. Bad Debt
6. Disputed Debt

Multiple measures should be used in-addition to standard Company KPI’s to give an overall analysis of employee and function efficiency in-line with SLA’s and Company strategy.

Using the Credit Policy

Now you have a suitable credit policy it is important to sign, circulate and utilise. Initially the credit policy should be signed off by the Company Directors / Managing Director and circulated to Heads of Department.

The credit policy should be utilised as a tool for the Credit Management function on a regular basis but also utilised in the Induction process of Credit Management employees who will need to understand the policy in-depth. Additionally the policy should be included within the Company Policies and Procedures, provided to every new employee and accessible at all times.

Be Interactive

To have a credit policy sat in a folder on someone’s desk is not the way to ensure supporting functions utilise and refer to such an important document. The way to maximise on engagement is to make it easy to access the credit policy. This can be done through the Induction process, by circulating the policy regularly to key contacts throughout the Company and by utilising an intranet system and having an online electronic version available; ideally all three!

Review

In business changes are a regular occurrence and with this is policy review. In-line with demand and performance the policy and procedures should be reviewed and where appropriate revised to support the overall Company strategy; not forgetting to archive outdated versions for record.