A
special note about credit policies
Credit and collection policies
are often avoided by entrepreneurs who are primarily interested in
selling. If that sounds like you, think about what could happen if
you sold a lot of your product to someone who never paid for it.
Because getting your customer
to pay you on time is so important to the financial health of your
business, let's look at how to develop credit policies and practices,
how to do a credit investigation and what are sensible collection
procedures.
Credit Policy
When a company decides
to sell goods or services on credit it is important to establish credit
and collection policies. These policies help you manage one of your
business's largest assets: the accounts receivable. How you manage
this asset influences the bottom line and affects your ability to
maintain the cash flow of your business. These policies should be
clear, in writing, and should explain the business's standards for
setting up accounts and collecting payments. You need to plan for
the problem of collecting money from your customers, and you must
develop guidelines as to how the problems will be handled.
The policy's goal should
be, within the bounds of sound credit practices, to find a suitable
credit practice in which every customer/client that desires to purchase
your product or service can do so. The terms of your credit agreement
need to be spelled out. You might decide on open account, limited
account, cash in advance, cash on delivery, or any other term of sale
that is common to your industry.
Document requirements for
an account to be opened. A properly completed credit application is
a must. Some businesses require a tax certificate or other financial
statements from businesses to which they are extending credit. Document
your terms of sale. Spell out in detail the avenue of authority to
be followed for approval or denial of a new account so everyone will
understand where the responsibility lies.
Some customers will not
or cannot pay their bill. That is why it is important to have a policy
for collections. Your policy should include the steps for collection,
and the specific sequence of these steps. Almost every account, no
matter how long you have sold them or how well you know them, will
become delinquent at one time or another. You must protect the assets
of your company while preserving the integrity of your customer base
at the same time. It's a delicate balance.
Credit Investigation
The credit application
is the foundation of a customer file. You need information about your
customers to make a valid decision on their account status and amount
of credit you will make available to them.
You will want to create
your own credit application to meet the needs of your company and
your industry. (Examples of credit applications are at the end of
this narrative overview.) Try to acquire several credit applications
from companies to help you design a document to serve your needs.
When deciding whether to
extend credit to a customer, follow these steps:
- Verify the information
on the credit application
- Check out the credit
references given by the customer
- Gather other information,
such as:
- a trade report on
the customer
- a financial statement
- any other documents
or information unique to your industry
Gather this information
up front because it is difficult to get it after a credit problem
has surfaced.
After the credit investigation,
make a decision regarding credit for the customer. Decide the amount
of credit exposure you feel you can take with the customer, the terms
of sale for the customer, and the type of security you may require.
When credit is extended
and the account is open, a letter should go to the customers you approve
which outlines your terms of sale, the amount of credit exposure you
will assume on the account, and your office policies. If you are unable
to accommodate a customer's request for credit, be sure to follow
all of the guidelines set up in the Equal Credit Opportunity Act when
notifying the customer of a denial of credit. Guidelines for the Equal
Credit Opportunity Act can be obtained from your library.
Collection Procedures
How you deal with past
due accounts is very important. You may want to consider how accounts
are collected by your competitors to see what the industry standard
is whether this is an aspect of customer service you can improve on.
The collection policies and how the customer is treated will reflect
the philosophy and integrity of the business.
The customer always wants
to be number one, and making the customer feel "number one" is vital.
Showing genuine concern for the customer and his or her problems is
the foundation for good customer service. The collection process must
be based on good sound standards. The steps must be simple, consistent,
and easy to understand.
Sample Collection Steps
1. Notification
- Original Invoice: A
listing of the merchandise/services sent at the time of the sale.
This invoice should have your terms of sale listed on it.
- Statement: A recap of
the invoices and payments sent at the end of the billing cycle with
your terms of sale stated on it.
2. Reminders
Work out a payment agreement
with the customer; perhaps paying cash for the new product or service
at the time of sale, and an agreed payment plan for the outstanding
balance.
Click
here to view sample collection letters.
Conclusion
Following simple, clear
and basic credit and collection policies and procedures will help
to keep your accounts receivable healthy. When extending credit to
customers, do your homework. A certain amount of flexibility will
always be necessary as you work with customers to pay their obligations
to you. If you want to continue business with customers, you will
need to be honest and up front.
