Credit Policy
HOW TO CREATE AN EFFECTIVE
CREDIT & COLLECTIONS POLICY
What Is A Credit & Collections Policy And Why Do We Need One?
A Credit & Collections Policy should be an organized, repeatable practice or philosophy that a company adopts in order to control the risk it assumes when extending net payment terms to its customers. It can be as general or as specific as your company would like it to be.
First and foremost, you should have a credit and collections policy in order to protect your accounts receivable. You probably go to great lengths to conceive (or license), design, manufacture, warehouse, market, sell and ship great product. Obviously, these are essential to your businesses success. For without great product, in stock, how can you make sales?
But a sale that doesn’t get paid is not a sale. It is a loss. Your company’s accounts receivable is a short-term asset. Along with cash and inventory is one of the most important assets you have.
The more predictably and effectively you can convert your A/R, the better your cashflow will be. Solid A/R is insurable, factorable and is taken into consideration when your company applies for loans and credit lines.
Imagine what would happen if you walked into a bank and asked for a loan without offering collateral. Or if you tried to get a car financed with just the names of three people you’ve paid as references. Obviously, you would be turned down. There is very little difference between being a trade creditor and being a loan officer. Both are lending capital: one in the form of cash, the other in the form of product that you’ve already invested cash into.
In addition to protecting your investment, a pre-set Credit & Collections Policy will give stability, efficiency and effectiveness to your company. A solid, repeatable policy allows all departments to understand your company’s values and work flows. Without it, there is no set way of doing things that pertain to cashflow. It also prevents any
CREDIT & COLLECTIONS POLICY
What Is A Credit & Collections Policy And Why Do We Need One?
A Credit & Collections Policy should be an organized, repeatable practice or philosophy that a company adopts in order to control the risk it assumes when extending net payment terms to its customers. It can be as general or as specific as your company would like it to be.
First and foremost, you should have a credit and collections policy in order to protect your accounts receivable. You probably go to great lengths to conceive (or license), design, manufacture, warehouse, market, sell and ship great product. Obviously, these are essential to your businesses success. For without great product, in stock, how can you make sales?
But a sale that doesn’t get paid is not a sale. It is a loss. Your company’s accounts receivable is a short-term asset. Along with cash and inventory is one of the most important assets you have.
The more predictably and effectively you can convert your A/R, the better your cashflow will be. Solid A/R is insurable, factorable and is taken into consideration when your company applies for loans and credit lines.
Imagine what would happen if you walked into a bank and asked for a loan without offering collateral. Or if you tried to get a car financed with just the names of three people you’ve paid as references. Obviously, you would be turned down. There is very little difference between being a trade creditor and being a loan officer. Both are lending capital: one in the form of cash, the other in the form of product that you’ve already invested cash into.
In addition to protecting your investment, a pre-set Credit & Collections Policy will give stability, efficiency and effectiveness to your company. A solid, repeatable policy allows all departments to understand your company’s values and work flows. Without it, there is no set way of doing things that pertain to cashflow. It also prevents any