Credit Policies

Do you know what the credit control policy of your company is? Do they have credit policies?

It is sometimes revealing to ask these questions. Firstly many companies do not have any written credit control policies – apart from the need to be paid as quickly as possible. Often companies that do have credit polices do not disseminate them through the company, as often sales as well as credit departments need to know what these are. Again management often think that they have good credit control policies in place, but when junior staff are asked they tell that they are not allowed to follow the polices or that they are unworkable.

Credit control policies should be well thought out and be known, and have support through-out the company.

Often agreements have to be accommodated between sales and credit departments. Credit controllers want fixed clear guide lines that apply to everyone and sales departments want a referral for anything that will happen on an account; neither of these are workable in any large company on a long term basis.

Credit policies that are too firm do lose sales for companies, and credit policies that are too relaxed do cause an increase in the cost of bad debts.

It helps if credit policies are realistic. I once worked for a software company. When the sales department took and order for new bespoke software they sent the details to the accounts department who then issued an invoice that same day or the next, these invoices were to be paid within five days. The invoices never were. The credit controller was forced to call the customer on the sixth day and ask for payment – this caused much customer relation problems. The main issue here was the customer was unaware they would be billed so quickly and be expected to pay the invoice within such a short period of time. This credit policy was not based on reality and the company employed a new credit controller every ¾ months as they kept leaving. This company could have considered the next section – should they have been giving credit at all?

The average, if a company gives credit, is 30 days and then the credit controller has 7/14 days leeway to have the account paid or it escalates to further action. The above is average, many multi-national companies who supply goods to distributors take a payment at the end of the month for all goods ordered and delivered that month – often they will take this payment by direct debit – no exceptions – they do not allow anything to stop the payment, and they will charge interest on non-payment at that day – the cost of credit for a day or two eats to far into their margins.

What you should take from this page:

  • Your company should have credit control policies
  • The policies should be well known by all
  • The policies should be agreed by all departments
  • Credit control policies should be realistic