Basic Outline for Developing a Credit Policy

Per Dictionary.Cambridge.org, a Credit Policy is a set of principles that a financial organization or business uses in deciding who it will loan money to or give credit to.

• A credit policy, however, should be more than a list of credit department guidelines. Properly developed, it can be a critical tool for maintaining alignment on credit issues throughout your company.
• A well-written, comprehensive credit policy communicates a consistent standard to your customers. It documents and supports corporate goals, clarifies authorization levels, defines expectations and responsibilities and enhances cross-functional cooperation especially between the credit and sales departments.

Sounds great, right? So, where do you begin?

While there is no single definitive credit policy, this article outlines some of the items you should include. We have also provided sample text you can edit and customize for use in creating a credit policy that meets the needs of your particular organization.

Outline of a Credit Policy

Section 1: Credit Department Mission

Start by developing a mission statement for your department. This will differ from your company’s corporate mission statement, but it should be in full alignment with it. You will want to get input from upper-level management and the sales department. It’s important that your sales team understands how the credit department will work to help ensure their success within the corporate guidelines.

Credit policies should reflect corporate goals, as well as the company’s capacity for risk. For instance, new companies may have to take on higher risk customers in order to develop market share. Firmly established organizations may be able to control their credit risk more stringently.

Credit Department Mission Statement (sample text):

• To support the financial goals of [company] and, specifically, to support its sales efforts, while maintaining the highest quality of accounts receivable within the corporation’s capacity for risk.
• To provide flexible mechanisms to sell to a broad range of customers while ensuring that only prudent credit risks are taken and cash flow is maintained.
• To maintain customer goodwill during the collection process. To keep sales and senior management informed about emerging problems including non-collectable accounts and order holds.

Section 2: Credit Department Goals

Departmental goals should be set based on your company’s cash flow requirements. They should track with current market conditions, reflect the strategic direction of your organization, support sales objectives, and change based on the state of the economy and with the financial requirements of the company.

Goal targets should be determined based on industry benchmarks, where possible, or on improving your own past results.

Sample Credit Department goals:

• To open XX new accounts during the course of the year.
• A target for the percentage of bad debts to sales.
• Percentage targets for acceptable account aging, i.e. % current, average days delinquent, percent over 90 days past due.
• Targets for typical receivables ratios used by your department, i.e. Collection Effectiveness Index (CEI), Days Sales Outstanding (DSO), percentage of sales ultimately written off, etc.

Section 3: Roles, Responsibilities and Authorization Level

This section should contain a brief description of the roles and responsibilities of each department member. You can include written job descriptions if desired.

Sample Credit Department Roles & Descriptions:

• CFO: Ultimate authority for Credit Department; oversees the entire team and works with managers on recruitment, hiring and overall staff management policies.
• Credit Director/Manager:  Reports to the CFO. Plans, organizes, leads and controls the credit function. Responsible for day-to-day management and training of the credit staff, determines procedures and rules for the entire department, authorizes credit limits over $500.00. Selects outside collection agencies and/or outsourcing firms with the approval of the CFO.
• Billing/Invoicing Manager: Reports to the Credit Manager. Responsible for the day-to-day management and training of the personnel within the Billing Department, maintaining high standards of invoice accuracy, handling invoicing disputes, deductions and all matters pertaining to billing. Reviews the daily aging report.
• Collections Manager: Reports to the Credit Manager. Responsible for the day-to-day management and training of the in-house collection team. Coordinates with outside collection agencies. Has input into the selection of any outside collection resources. Authorizes payment terms with the approval of the Credit Director.
• Credit Analyst: Reports to the Credit Manager. Obtains and analyzes financials, analyzes credit reports for clients requesting credit limits of more than $500, assigns credit limits up to $250,000.
• Billing Clerk: Reports to the Billing Manager. Responsible for preparing the invoices and ensuring that they are sent on time, maintains the aging report, provides other support services to the Billing Manager as required.
• Collection Specialist: Reports to the Collections Manager. Contacts past due accounts per requirements. Accepts payment terms with the approval of the Collections Manager. Maintains records in the collection system.
• Credit and Collection Assistant: Obtains signed credit applications, reviews for completeness. Requests credit references and follows up. Pulls credit reports. Provides other support functions as needed.

Section 4: Procedures

This is the nuts and bolts of your credit policy. It’s essential that the rules apply to all customers, with very few exceptions, and that they are consistently enforced. The procedures should be somewhat flexible, but not so vague that they are subject to interpretation by every member of the department.