A credit policy is one of the most important financial controls in a business that offers credit terms to its customers. It is particularly important where a business is in financial distress or is in a turnaround situation and is almost certainly a mandatory requirement for those businesses that use credit insurance or either invoice discounting or invoice factoring as a source of finance.
At the heart of a credit policy is the mitigation of credit risk. This can manifest itself in the following ways:
failure to secure finance
redundant resources / exit costs
failure to secure trade credit
fall in asset values or other security
increased financing costs
failure of suppliers
bad debts / trading losses
loss of customers / sales
The essential elements of a credit policy will depend on the strategy and structure of the particular business, however it is likely to include the following points:
a recognition that there can be a conflicting interests between sales and finance and that the policy provides a means of reconciling differences
it should establish the terms of trade on which the company is prepared to sell goods to customers on credit, with an escalation procedure if there are unusual circumstances that demand a variation to terms
if there are maintenance agreements, these should be paid for before the start of the contract
the process for opening new customer accounts, clearly stating who which officers can authorise to which credit limits and the circumstances of external credit vetting services
the process for reviewing the level of trade with specific customers and their payment history
account collection procedures to be followed by the credit team and the escalation process for accounts that are not collected according to terms
debtor review meetings are a cross-functional mechanism for reviewing accounts that are difficult to collect and should include sales and operations as well as finance
the stop process and where there are maintenance contracts, the process for continuing service that has been paid for but there are subsequent invoices unpaid
the basis on which credit notes are raised and the delegated limits for authorising credit notes. All credit notes must conform to a pre-set range of reasons
the basis on which settlement discount can be claimed (and approved) or any other enticements that the company may offer to promote prompt payment
I have implemented this style of policy, including Fiddes Payne, Interconnect and Securicor Telecom, Automatic Minibars and Torex Retail .
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