Your Credit Policy is a reflection of your company’s values and mission. While you may have spent hours on finding perfect words for your values, if you don’t back them up with a company policy regarding credit which meshes well with your values, then you present a conflicting and confusing front to your new and existing customers
Part 1 of this series gave tips which your customers will come to understand over time. The next tips here are more background, or foundation policies upon which your business grows, guarantees which protect the supplier against bad debt.
This credit policy you’re building needs to be checked every 6 months to take into account any changes to your business. If you are running a policy and during the day to day of running your business there are bugs, fixing those bugs is great. If you haven’t documented and changed the credit policy to reflect this, any new staff are going to be working on an outdated policy, and potentially jeopardising your cash flow.
Here are my 8 points of advice for building upon your credit policy to ensure you are aiming for best practice at all times:
- What kind of reports can your system produce?
- Which are the most useful for your KPIs and for serving your customer base?
- Who within your business needs to see these reports?
- What will they be used for?
Credit Limit Review
- How often is this review made on your customers?
- What criteria are set for these reviews?
- Who conducts these reviews?
- Who makes the ultimate decision on any change to a customer’s credit limit?
- This is a third party service. Agencies monitor your debtors for anything lodged with ASIC such as change of director, administrators and so on. Good to keep abreast of the situation, but it does have a small cost involved.
- When do you decide a debtor needs monitoring? Is this decision standard across the board?
- Which service will you use? Veda? D&B? Creditor Watch?
- What information would you like from this service?
- What will you do with the information once you have received it?
- When is it appropriate to raise a journal on a Debtor?
- Who has permission to raise a journal?
- What will each journal consist of?
- What is your procedure once you discover a debtor has had an Administrator appointed?
- Do you have PPSA registrations? (Personal Properties Securities Act)
Personal Property Securities Act (PPSA Registration)
- This new legislation came into effect January 2012. It replaced the Retention of Title clauses in T&C’s. You now must register your security in regards to your goods and services to ensure you’re overed if your client’s business fails.
- Ask yourself- is this registration relevant to your business?
- Which customers would you register for this?
- What is your selection criteria for the above?
- What is your record keeping and database management for these clients?
- Do you have this?
- When do you inform your debtors that you have insured?
- What documentation is required by the insurer, and how often does it need to be updated?
- First question- should you outsource? What are the pros and cons of doing so?
- How do you guarantee customer security if you choose to outsource?
- Which specific functions will you outsource?
- Which functions do you keep in-house?
- Do you tell your customers that you are outsourcing?
I am currently working with a business which has grown significantly in recent years. Beginning life as a small partnership they are now a company which turns over 8-9 million dollars per year. They have 3000 plus customers on various payment terms and they have a significant number of debtors who are well outside the agreed upon terms and conditions.
This company does not have a credit policy.
This company is still trading with their customers in exactly the same way as when they started out. They have not scaled their operations up to meet the demands of bigger clients. Their industry is a high-risk industry, and debtors who skip on their payments is actually a common practice.
They have now realised that their company needs a strong credit policy. Why?
- The lack of clear policy and procedures pushes the onus back onto staff to use their own initiative to determine what is acceptable for the business. There are no standard rules.
- The larger customers are funding the business
- They have far too much debt in the 60-90 day range. And it is getting harder to collect.
- They are increasing the number of bed debt write-offs.
- Their cash flow is severely reduced. Too many customers have not paid accounts for some time.
When implementing their new policy they will face some hurdles:
- The culture of their business is going to change dramatically.
- The new policy will need to be sold to sales and marketing.
- There will need to be training for all staff, and encouragement to get them on board.
- They may lose some customers
- Some who are used to paying whenever they like.
- Others with uncertainty at change.
- Implementing a standard business practice may cause angst amongst some of their customers.
- How do you notify all existing customers of this change?
And while they may lose some customers over this change, when you look at it, what are the customers you may lose? The ones who are bad at paying? The customers who are hampering your cash flow and hurting your business?
The next 12-18 months will be a difficult and challenging time for the business as they first assess all current processes and procedures and establish where they need to improve. They then need to work on what their Credit Policy will look like and then finally implementing the policies and procedures to get their debtors under control.
If you’ve reviewed your Credit Policy and have found it wanting, or if you don’t have one at all, then give BDM Credit Management a call 1300 164 192