Salient Features of a Good Credit Policy and Procedures Manual

It is very important for any credit control or management department to be effective, there should be institute a credit policy and procedures manual.

So what should be in the content of such a credit policy and procedural manual? A good Credit Policy and Procedures Manual should contain the following:

  1. A clear statement of credit policy,
  2. Credit terms,
  3. Conditions of sale,
  4. Cash discounts,
  5. Methods of payment for various types of account,
  6. Procedures for
    • opening of accounts,
    • account collection,
    • credit sanctioning,
    • legal action,
    • disputes,
    • bad debts,
    • stopping the supply of goods to a customer,
    • credit limits (including extension of new credit limits whether higher or lower amount),
    • export collection,
    • credit insurance,
    • specimens of management information forms and reports and the timeline,
    • standard letters.

Explanatory notes to the above:

  1. A statement of Credit policy
    This is the most important as Top management must set the policy. It is logical as this will quells any future disputes between marketing and credit management departments. Sales will therefore not being overreach at the expense of higher credit risk.Therefore, this policy statement shall depend on many factors like cash needs, sales volume, market conditions, type of business and others. By having a proper policy, credit personnel will be able to do an efficient job by avoiding unreasonable and unnecessary risk, constant look out of receivables, prompt collection efforts and alertness to danger signals indicating an account in trouble.The credit policy will be reviewed periodically by top management to ensure that the company’s goals remain unchanged.
  2. Credit Terms
    The Company’s credit term must be clearly defined. For example, “strictly with 30 days ” from the date of invoices.Otherwise, certain interest charges will be imposed. No customers like to charge interest hence the important of dictating this clause and making sure customers are aware of it. Typical example like “ interest charges of 1.5% per month calculated on a Daily basis, will be levied on all amount that exceeds 45 days from the date of the Invoices/Debit Note”. This should be imprinted or chop onto our Delivery Order and Sales Invoice.Interest charges levied on overdue account will have to be settled promptly and there will be no waiving of the interest charged unless approved by the Managing Director.
  3. Conditions of Sales
    It is important that the customer clearly understands the company’s terms and condition of sale and their contractual obligations upon signing the purchase agreement with the company.
  4. Cash Discounts
    Cash discounts assist the cash flow of the company when the customers would like to take pay earlier before the expiry of their credit terms. Therefore, it is important that the exact criteria to achieve these cash discount should be clearly stated to avoid possible disputes with the customers.
  5. Methods of payment for various type of accounts
    Where the company has conducted several type of business like project basis, sale of goods or sales of services, it needs to state the method of payment otherwise this will hinder the future cash collection from the customers who will say that they are not aware of it as it was not correctly spelled upfront.

In the forthcoming article, we shall discuss the measurements of key performance indicators in credit management.

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March 23, 2006  Tags: Credit control, Credit management, credit policy, credit procedures  Posted in: CREDIT MANAGEMENT/CONTROL

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