The document discusses credit and collection policies. It provides an overview of what a credit and collection policy is, who is responsible for creating it, and how to develop one. It notes that the policy should include guidelines for credit terms, customer qualification criteria, collection procedures, and steps for customer delinquency. It also discusses the importance of having a policy to ensure timely payment, minimize bad debt, protect customer relationships, and improve efficiency. The document then provides a sample outline for a credit policy, including sections on the credit department mission, goals, roles and responsibilities, procedures, and metrics for measuring results.

1. By: Group 1
CHAPTER 5

2. CREDIT AND COLLECTION
POLICIES

3. • What is Credit and Collection
Policy?
• Who is incharge to create it?
• How to develop a Credit and
Collection Policy?
• When do you make it?
• What are the types of Credit
Policies?
• How is it important?
• What is its Goals?
Topic Overview

4. It is a document that includes:
clear, written guidelines that set
the terms and conditions for
supplying goods on credit,
customer qualification criteria,
procedure for making collections,
and steps to be taken in case of
customer delinquency.
Credit and Collection Policy

5. A credit manager or credit committee
for certain businesses are usually
responsible for administering credit
policies.
Responsible for Credit and Collection Policy
Data

6. Basic Outline for Developing a Credit Policy
01
Credit Department Mission

7. Basic Outline for Developing a Credit Policy
01 Credit Department Mission Statement (sample text) :
• To support the financial goals of [company] and, specifically, to support
its sales efforts, while maintaining the highest quality of accounts
receivable within the corporation’s capacity for risk.
• To provide flexible mechanisms to sell to a broad range of customers
while ensuring that only prudent credit risks are taken and cash flow is
maintained.
• To maintain customer goodwill during the collection process. To keep
sales and senior management informed about emerging problems
including non-collectable accounts and order holds.

8. Basic Outline for Developing a Credit Policy
02
Credit Department Goals

9. Basic Outline for Developing a Credit Policy
02 Sample Credit Department goals:
• To open XX new accounts during the course of the year.
• A target for the percentage of bad debts to sales.
• Percentage targets for acceptable account aging, i.e. % current, average days
delinquent, percent over 90 days past due.
• Targets for typical receivables ratios used by your department, i.e. Collection
Effectiveness Index (CEI), Days Sales Outstanding (DSO), percentage of sales
ultimately written off, etc.

10. Basic Outline for Developing a Credit Policy
03
Roles, Responsibilities and
Authorization Level

11. Basic Outline for Developing a Credit Policy
03 Sample Credit Department Roles & Descriptions:
• CFO: Ultimate authority for Credit Department; oversees the entire team
and works with managers on recruitment, hiring and overall staff
management policies.
• Credit Director/Manager: Reports to the CFO. Plans, organizes, leads
and controls the credit function. Responsible for day-to-day management
and training of the credit staff, determines procedures and rules for the
entire department, authorizes credit limits over $500.00. Selects outside
collection agencies and/or outsourcing firms with the approval of the CFO.

12. Basic Outline for Developing a Credit Policy
04
Procedures

13. Basic Outline for Developing a Credit Policy
04 In this section, include the processes for:
1. Evaluating New Customers’ Creditworthiness
2. Reevaluating the Creditworthiness of Existing Customers
3. Terms and Conditions of Sale
4. Invoicing
5. Collections

14. Basic Outline for Developing a Credit Policy
05
Measuring Results

15. Credit and collection policy is created:
• Regularly
• Yearly

16. Credit and collection policy is created:
Recent survey from Credit Today revealed that nearly 50% of
companies are reviewing their policy far less frequently.
Some of the major points from the study include:
o 19% said they review and adjust their policy every 2 years.
o 13% said they review and adjust their policy every 3 years.
o 15% reported they only review and adjust their policy when
they need to.
o 12% said “other” which really makes you wonder the last
update took place.

17. Credit and collection policy is created:
SMB businesses are by far the worst offenders of neglect
when it comes to their collections policy, and these are the
companies who should be the most invested in formulating
an A/R strategy that brings in the cash flow they need to
grow their businesses.

18. Task Name
Task Name
04
Types of Credit Policy
01 02
03
• Loose credit • Flexible credit
• Tight credit • No credit

19. Task Name
Task Name
Types of Credit Policy
01 • Loose credit
Represents a greater willingness to extend
credit to grow the business; a strategy to
take on higher credit risk and reap the
rewards.

20. Task Name
Task Name
Types of Credit Policy
02 • Flexible credit
Represents a willingness to extend credit
depending on circumstances. It’s generally
a neutral strategy that does not
aggressively grow or restrict access to
credit for clients.

21. Task Name
Task Name
Types of Credit Policy
03 • Tight credit
Generally means less willingness to extend
credit to support revenue growth. This is a
strategy of restraint often implemented to
limit credit losses and/or replenish capital.

22. Task Name
Task Name
Types of Credit Policy
04 • No credit
This is an unwillingness to extend credit, as
a company is highly risk-averse or has no
business case to support the cost/benefit
of extending credit.

23. Task Name
Task Name
WHY IS IT IMPORTANT TO HAVE A
CREDIT COLLECTIONS POLICY IN PLACE?
Having a credit collections policy is important for
several reasons:
• Ensuring timely payment
• Minimizing bad debt
• Protecting customer relationships
• Improving efficiency

24. Task Name
Task Name
WHY IS IT IMPORTANT TO HAVE A
CREDIT COLLECTIONS POLICY IN PLACE?
A well written and comprehensive credit collection policy will:
• Ensure continuity in the department in the event that key
personnel leave the credit department.
• Help make sure all customers are treated fairly.
• Ensure consistent credit decisions are being made.
• Be used as a training tool for new sales associates and the credit
and collections team.
• Be used to ensure consistency of procedure and execution
between the credit department, sales, and management.

25. GOALS OF A COLLECTIONS POLICY
- To protect accounts receivable.

26. GOALS OF A COLLECTIONS POLICY
Common goals of collections departments include:
• To have your Collections Effectiveness Index (CEI) be at a defined
number or higher
• To have your Days Sales Outstanding (DSO) be at a defined
number or lower
• To reduce your bad debt by a targeted amount
• To reduce the number of invoices sent to a third-party collections
agency

27. References:
Collections Policy Step-By-Step Guide – Dun & Bradstreet. (n.d.). Collections Policy Step-By-Step Guide – Dun &
Bradstreet. Retrieved April 10, 2023, from https://www.dnb.com/resources/collections-policy.html
Credit Policy. (n.d.). Corporate Finance Institute. Retrieved April 10, 2023, from
https://corporatefinanceinstitute.com/resources/commercial-lending/credit-policy/
Test, A. (2020, October 30). Credit & Collection Policy Basics | ABC-Amega. ABC-Amega, Inc. Retrieved April 10,
2023, from https://www.abc-amega.com/articles/credit-and-collection-policy-basics/
Test, A. (2020, October 30). Basic Outline for Developing a Credit Policy | ABC-Amega. ABC-Amega, Inc. Retrieved
April 10, 2023, from https://www.abc-amega.com/articles/basic-outline-for-developing-a-credit-policy/
W. (2017, October 6). WHAT ARE CREDIT AND COLLECTIONS POLICIES AND PROCEDURES? Lockstep. Retrieved
April 10, 2023, from https://lockstep.io/blog/credit-collections-policy/
What Is Credit Control? Meaning and How It Works. (2023, February 18). Investopedia. Retrieved April 10, 2023,
from https://www.investopedia.com/terms/c/credit-control.asp