Carol Baker's credit management checklist

In this classic BusinessZONE Expert Guide, Carol Baker explains how to improve your company's cash flow, establish a correct credit policy for collecting your debts, and tells you how to deal with common excuses for late payment.

Quick links 

• Credit Policy
• Checklist: Factors influencing your Credit Policy
• Reducing slow payers - top 10 tips
• Dealing with typical excuses

Background
Today, few companies can hope to survive unless they offer some form of trade credit. A company that decides to extend credit to its customers accepts a risk. The company is, in effect, lending its money to its customer. There is always a risk in lending money, and there are two areas of risk: the risk of bad debt, and the risk that customers will not pay on due date.

The bad debt is a total loss. The company has provided its goods or services and is not going to be paid. Because of the risk, companies make a provision for this and in accepting the risk, they also accept that some bad debt is likely to arise.

The second area of risk - the slow payer - is not often perceived as such a problem. After all, we will get paid - eventually. It is not a case of bad debt - we just have to wait for our money. This philosophy ignores the fact that slow payers erode our profit. Most companies are subject to the 80/20 rule - ie 80% of business comes from 20% of their customers. Very often that 20% will contain an element of slow payers.

Of course, when these customers do pay, they pay substantial sums. That can deceive us into a sense of false security. We get a lot of cash in a particular month but, in fact, the customer is making on account payments and constantly exceeds our terms.

Credit Policy
All organisations need rules and regulations. Every company should have, or use, some form of Terms and Conditions of Sale as the rules and regulations which govern trading with a customer. But how many companies have a written down credit policy? A Credit Policy is an important document. It provides internal controls to ensure that selling and collecting on credit are handled efficiently and in the best interest of the company. Because of this, many companies see it as a financial tool.

Although it is a document for protecting the financial health of the company it should also ensure high levels of customer service. It is, therefore, more than just a financial document. It is a set of rules which have to be accepted by both finance and sales departments if it is to be workable. It has to be one that ensures financial issues are supported whilst supporting Sales in their efforts to sell.

About the author
Carol Baker wrote this article when she was editor of our sister site Business Zone some 10 years ago. She has since moved on to become editor of Credit Control Journal, but her advice is just as relevant today as it was in 2000-01.

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