CMA Daily News

Encyclopedia of Credit Updated

30 new articles and several forms have been added to the Encyclopedia of Credit. Visit today at http://www.encyclopediaofcredit.com

If you have forms to share (contracts, credit policy, collection letters etc.) upload them in the forms section of the Encyclopedia.

Improve Collection Performance

Credit professionals must constantly look for ways to improve their department's collection skills. Here are some ideas to reduce delinquencies:

• Make certain your credit application and as well as your invoices clearly list your terms of sale.
• Be sure that your order entry department does not process purchase orders with incorrect terms of sale until a written amendment to the P.O. is received.
• Pay attention to how a debtor is paying other creditors. If you are being paid on time while other creditors are not, it is unlikely your luck will last.
• Once an account becomes seriously past due, before releasing any new orders after the debt is paid the file should be updated and a decision made about whether the customer still qualifies for open account terms.
• Try to update each active customer's credit file at least once a year.
• Shorten the time between the invoice due date and the first contact by the collector to request payment.
• Attempt to resolve disputes quickly. Always ask the customer to immediately pay the undisputed portion of outstanding invoice.

Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.

Credit Policy Checklist

(Excerpt from The Encyclopedia of Credit)

A well-defined and complete credit policy includes:

1. formal organization of department
2. job description, titles, and review process
3. credit department budget guidelines
4. credit documentation required for credit file
5. methods of gathering credit information
6. time limits for credit decisions
7. established credit lines and procedure for establishing new lines
8. procedure for communicating the decision to the customer
9. procedure for communicating the decision to management
10. procedure for communicating the decision to the sales department
11. procedure for communicating the decision to operations
12. guidelines for dealing with and assisting marginal accounts
13. a collection policy that reduces borrowing cost
14. a collection policy that deals with slow-paying accounts
15. a collection policy that minimizes bad debts
16. a policy for unearned discounts/unauthorized deductions
17. a policy for the handling of disputes
18. a policy for the handling of returned and damaged merchandise
19. establishment of terms of sale
20. policies for using secured transaction for protection
21. a policy for the use of guarantees
22. guidelines for reporting to upper management

Accounts Receivable Administration

The sum of all customer account balances must agree with the accounts receivable control account in the general ledger. This total reflects the company’s investment in accounts receivable.

As a shipment is made, its invoice is posted to the customer account, either manually with a hand-posted system or as a byproduct of billing in an automated system. Credits and payments are also posted, so at any time the sum of the open items represents the balance due from the customer. From a credit perspective, accounts receivable administration reflects the credit parameters established for customers, along with a historical summary of the transactions that have taken place. Thus, it may involve customer identifiers, credit limits, credit agency ratings, daily shipping amounts, aging of open items, terms and a payment summary. Quantitative data for reports include number of invoices, checks, credits, discount or other terms violations, short payments and overpayments. The ledger should also contain a summary of order activity along with the impact on the balance due of any orders that have been approved or held but not yet shipped. This will provide an accurate view of the account as it looks when those orders are shipped and billed.

Provided by the anscers Encyclopedia of Credit.

Credit Policy - from EOC

  Because credit policy concerns the company as a whole, it is usually established officially by top management. Sometimes responsibility for its formulation lies altogether with top management, but more commonly the chief credit executive and associates play an active role in its development. The heads of other interested departments may also be consulted.

Credit policy is probably most effectively implemented when all who are directly affected have some voice in its development. A credit policy assures that there will be consistency across departmental functions. It requires the endorsement of top management, preferably the board of directors.
While credit policy is the cornerstone of credit administration, there is no exclusive acceptable format.

If a credit policy is to have practical value, it must be related to a specific company, reflecting the goals that the company has set for receivables management. Every credit executive is entitled to a written policy statement from the officers of the company—one that is fully understood and accepted by sales as well as credit people. An effective credit policy permits and encourages the fullest development of the opportunities in administering credit. It can be a blueprint for action as well as a training aid for the development of credit personnel. It provides the latitude to plan departmental operations within the scope of the company policy, to create effective procedures and techniques to implement that policy, and to establish adequate controls. It can assure that there is consistency in the company’s dealings and interactions with its customers, and it provides a means of recognizing the importance of the credit function to the company.

In general, there are several key questions that should be answered when developing a credit policy.

• What is the credit department’s mission? This also can be called a vision or purpose. It states the overall objective for the credit function.
• What are the goals? Goals can be specifically stated, such as a quantifiable measure, or more generally as an expressed desire to achieve improvement in a specific area.
• What are the roles and specific authorities of the credit department management and staff? This defines the boundaries of the credit function, often in terms of interactions with other departments.
• What are the primary criteria for evaluating customer credit? This describes credit procedures in more detail, listing key aspects of the credit review and analysis processes.
• What are the normal collection procedures? This describes the steps to be taken in customer collection activities.
• What are the company’s terms of sale? Terms should be spelled out by major product line, with any qualifications or restrictions included.

Read more about Credit Policy in the Departmental Operations section of the Encyclopedia of Credit.