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Create a Credit Policy Manual

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Create a Credit Policy Manual

Create a Credit Policy Manual

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Create a Credit Policy Manual Presentation Transcript

  • 1. © 2006 Michael C. Dennis, All Rights Reserved Presented by Michael C. Dennis, M.B.A, C.B.F. For CMA Business Credit Services January 25, 2007 1
  • 2. The opinions presented in this program are those of the instructor. His opinions and recommendations do not necessarily reflect the views of CMA Business Credit Services or its officers and directors. 2
  • 3. • A written policy provides a structured approach to risk management and the debt collection process. • A written credit policy provides a certain amount of consistency which is important to the department’s reputation. • It helps ensure a consistent approach among customers, reducing the chance of personal bias affecting the decision making process. • A written policy can be reviewed by senior management and either accepted or modified – helping ensure that the credit department focuses on what the company considers vital. 3
  • 4. • A policy manual can also be used as a training tool for credit as well as sales personnel. • Subordinates can use a written credit policy as a reference manual. • The credit policy can be used to establish expectations relating to the job performance of credit department personnel. • Thus, it can be used to measure and evaluate job performance. 4
  • 5. • Credit policies differ from company to company in length, content and complexity. • Credit policies must also change over time. • To be relevant and worthwhile, a credit policy must be current, not out of date. • In other words, credit policies must be reviewed and updated periodically. • The decision not to periodically update the credit policy manual is probably the biggest reason that credit policies are not viewed as essential by many creditor companies. 5
  • 6. • A credit policy describes a general course of action. It is not appropriate in every situation. A credit policy should address all of the following questions: • Will a credit application be required? • Must it be signed, and if so by whom? • What are the company’s standard terms of sale, and who can approve exceptions to standard terms? • Under what conditions will a personal guaranty or some other form of security be required? • Under what conditions will an applicant be required to provide rather than asked to provide financial statements? 6
  • 7. • What is our mission? What are our goals? • How is credit risk evaluated? • What skills are required before someone is given this authority to release orders and establish credit limits? • What are the job duties of each member of the credit department? • How is the department organized? • To whom does the credit department report? • What metrics are used to evaluate the performance of the credit department? 7
  • 8. • Will the Company sell to a debtor in possession? • What forms of security or collateral will the company accept? • How frequently must credit files be updated, and what information will be included in these updates? • Who will review the updated information? • What defines an unacceptable credit risk? • If challenged for an explanation about not approving open account terms, what explanation will be given? 8
  • 9. • How frequently must customers be contacted about past due balances, and how soon after an account becomes past due will the customer be contacted? • What is the process for escalating problems involving uncooperative debtors? • Who has the authority to place an account on hold? • Who is notified when an order is placed on hold and how soon does this notification take place? • Who can accept an extended payment proposal made by a customer? 9
  • 10. • Do publish the credit policy. • Do solicit feedback of a draft of the policy. • Do present updates to senior management for comment or sign off. • Avoid rigid rules. Credit policies to be adaptable to changing business conditions. • Do establish specific levels and limits of authority. • Do hold subordinates accountable for ignoring credit policies. • Always require written explanations about why a policy was disregarded. 10
  • 11. • Make sure the credit policy promotes sales. • The credit policy should address how much risk the department is willing to accept and at what point risks should be referred to senior management. • Include specific procedures to minimize delinquencies. • Include procedures that addresses fraud prevention. • Include a code of conduct for the credit department team. • Make sure nothing in the credit policies is at odds with the overarching needs or goals of the company you work for. 11
  • 12. Credit Policies Governing Follow Up on Past Due Accounts • They should describe the grace period before the initial call – if any. • Describe a specific and disciplined process for follow up • May include sending of computer generated statements and dunning notices. • Describe in detail the process for addressing disputes and customer deductions. • Explain the credit hold process • Indicate who can propose and who can accept a payment restructuring procedure 12
  • 13. • Departmental policies should never be in conflict with company personnel policies. Specific policies should address: • Minimum qualifications of applicants including education and experience. • The nature, structure, frequency and goals of any in- house credit and risk management training programs. • The way in which individual and team goals will be established • Describe guidelines for promotions or opportunities for special 13 assignments.
  • 14. Credit Policies for Customer Financial Analysis • Begin by describing which customers will be required to provide financial information. • Include an explanation of when and how customers will be contacted to request current financial statements. • Includes a description of what type of analysis will be performed on customers financial reports. • Lists the ratios that will be calculated. • Include an explanation of how heavily to weight a customer’s financial condition when establishing or re-evaluating credit limit and / or credit terms. 14
  • 15. Credit Policies for Substandard Credit Risks • Some customers will not qualify for open account terms and/or the amount of credit they require. Policies must be formulated to: • Notify sales and the customers about this problem. • Propose alternative methods of payment after determining which alternative(s) are acceptable. • Instructions about how frequently accounts will be re- evaluated, and what steps will be taken to measure improvements in creditworthiness. 15
  • 16. Credit Policies for Automatic Order Approval • The credit department’s goal is to delay as few orders as possible for as little time as possible. • To accomplish this, credit limits should be assigned to every account to minimize the need for manual intervention to release orders pending. • Any order for an account that is not past due and does not exceed the limit should be approved automatically, and without additional investigation or analysis. • Reviewing orders in the credit queue should be given the highest possible priority. • Whenever possible, the order release process should be automated. 16
  • 17. Credit Policies for Marginal Credit Risks • A working definition is that a marginal account is a customer that is financially weak. • Marginal accounts obviously present higher than normal risk relating to default or delinquency. • Marginal risk accounts are a source of incremental sales volume because they are a source of incremental profits if properly managed. • Credit policies should describe how to control and manage marginal risks. • The department’s goal is to control credit risk, not eliminate it entirely. 17
  • 18. Credit Policies on Periodic Review of Customer Accounts • Business conditions can change quickly. • Outdated customer files reduce the chances of preventing problems. Periodic reviews are the only solution to this problem. • The frequency and scope of credit reviews performed will vary with the type of customer, and the amount of credit exposure involved. • The goal is to determine whether the credit limit and payment terms are reasonable based on the customer’s financial strength and payment pattern. 18
  • 19. • Factors affecting a company’s credit policy include: • The company’s size • Its financial strength • Its loss history • The organization’s long term goals in terms of sales and market share growth • The size of its bad debt reserve • Its inventory levels • The company’s level of risk aversion • The actions of its competitors • The purchasing / negotiating power of its customers 19
  • 20. • General economic conditions • Company specific profitability • The company’s product’s shelf life • The number of competitors with goods that can be readily substituted • Whether customers stock goods or purchase on a Just In Time basis 20
  • 21. Formulating a Credit Policy • The process begins by understanding the objectives established for the credit department • It recognizes the importance of consistency in the decision making process • It must take into account the resources and resource constraints facing the credit department • It should make allowances for scenarios in which flexibility in credit decision making would be desirable 21
  • 22. • An essay on this topic is available at no cost: The Advantages and Disadvantages of Commercial Credit Insurance • I can be reached by email at: mcdennis@coveringcredit.com 22