Internal Credit Control - Credit Policies
International economic conditions change. Regional market conditions change. Therefore, management goals change.
It is management’s obligation to advise and consult with the credit department when considering a change of policy. Management should call for the expertise of this department when drawing up new programs relating to sales and the subsequent recovery of receivables.
It is your responsibility in the credit department to be aware of changes in economic conditions in order to advise and assist your management team with possible difficulties that may ensue.
The credit department is a vital segment of a company’s success. You must be aware, you must be consulted with and you must contribute to the decisions involving proposed changes. Company growth and its credit policies are inextricably tied together.
Credit Controls May Be Relaxed
For example, if the company plans a sales expansion program through increased geographic exploration, then there may have to be a relaxation of strict credit policy controls in those areas. There may be a dollar amount under which no credit check will be made. The decision may be that any order under $200 will be shipped at once rather than spending time and money in credit checking.
Such a policy may create a problem of money recovery, but it is a situation that is tolerable. You must set up tight controls so these new accounts are not neglected. You recognize that there will be a percentage of credit loss with such a sales expansion program. You must work closely with the salespeople in order to encourage this expansion while avoiding unnecessary risk.
Commercial and industrial experience has proven the following percentages: of 10 new customers, six will pay on time, two will pay in 60 to 90 days and two will become collection problems. Always watch your new sales. As money becomes tighter, you will receive one-time sales from firms that may be experiencing financial problems. These customers will bounce from business to business, and need your close attention.
The company can plan its expansion program based on this experience: of the 10 new sales, two to four will be one-time sales and bring a small credit loss; six to eight will become valuable customers in the future, two of whom will consistently pay in 60 to 90 days. Using these figures, the company can project sales expansion and the controller can project percentage of recovery. Of course, these figures vary by industry.
Faster Recovery May Be Required
Your industry may experience a tight supply for its raw materials or a profit squeeze through increased labor or supply costs. In this environment, growth through new customer acquisition may not be critical. Instead, supplying your existing accounts may be your highest priority.
In this instance, the credit department may be required to recover receivables more rapidly because the profit margin is reduced. The 60- to 90-day customers must be induced through closer contact—by reminders, notices, letters and tactful personal attention—to bring themselves within your company’s prescribed terms.
It is possible that your company may decide to reduce its customer list and sell more of its goods to fewer accounts. This is a policy of reducing inventory, storage space and employees. The credit department will then have to police larger—but fewer—accounts.
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