A credit and collections policy ensures that every collector is making the same decisions when it comes to managing accounts. If one collector is allowing customers to go further past due than another, your accounts receivable department will suffer. If difficult accounts aren’t being escalated to a credit manager, you have no transparency into why you aren’t collecting on all your invoices. A credit and collections policy keeps everyone on the same page, which is vital to an accounts receivable department working at top performance.
Your credit and collections policy can be as in depth or as brief as you would like, but keep in mind that even the most basic policy should help a company answer the following questions:
- What is the purpose of the policy?
- What are the goals of the credit department?
- How will those goals be measured?
- Who is responsible for what?
- What is the credit evaluation process?
- What is the collections process?
As you work through to build each section of your policy be sure to answer the above questions to help guide your sales and collections department. A solid credit policy will include the following sections:
A well crafted mission statement will define the purpose of the credit department and provide a general, long-term focus for the department as a whole. Be sure this statement aligns with the corporate mission, is specific to your industry, and has input from upper management as well as the sales and finance departments.
What is the objective of the credit department? What is the long-term goal and what are the short term goals that will help you work toward it? Be sure these goals are measurable. Some examples might be:
- To have a collection effectiveness index of X%
- Average days sales outstanding to be X days
- A bad debt write-off of X%
Be sure to research industry averages as you define your goals to ensure your goals are on target with your specific industry. This will also help you benchmark and compare yourself to your competition.
ROLES AND RESPONSIBILITIES
In this section you will describe the different roles of the department, who reports to whom, and who is responsible for what. Some of the roles you will want to define include:
- Credit manager
- Invoicing manager
- Collections manager
- Credit analyst
- Billing clerk
- Collection specialist
- Collections manager
This is the real meat of your credit policy. Here you will define the rules that apply to all customers (with as few exceptions as possible) to guide your sales and credit department. You want these rules to be flexible but not vague or open for interpretation. Some of the procedures you will want to define and explain include:
- Evaluating the creditworthiness of new customers and reevaluating that of current customers
- Terms and Conditions of sale
- Collections procedures
- Disputes and deductions
- Credit holds
- Payment plans
- Third party collections
- Law suits
It is important to measure the effectiveness of your credit department regularly; at least once every quarter. The metrics you are measuring would align with the goals you set in section two. So if your goal was to reduce DSO by X% how close are you to that percent? What can you do to get there? Your policy should be a living document, if you find you are struggling to meet your goals, make changes to your policy until you find what works for your specific organization.