Course Title: CREDIT AND COLLECTION

Course Code: P23O6

OVERVIEW:
 Many businesses have failed because of weaknesses in
collection policy or the absence of a collection policy.
 Some businesses emphasize selling or lending but realize
too late that insufficient time was devoted to collecting.
 The statement that a sale is not a sale unless collected is
often said.
Question

Why we must avoid long overdue accounts?

OVERVIEW:
 The business transaction, whether a sale or a loan, is
concluded only upon collection.
 For the business to run smoothly, working capital
must be replenished continuously by inflow of cash
from customers.
 This emphasizes the important role of collection of
accounts in the management of an enterprise.
Credit and Collection Policy Defined




A credit collections policy is a document that
includes "clear, written guidelines that set the terms
and conditions for supplying goods on credit,
customer qualification criteria, procedure for making
collections, and steps to be taken in case of
customer delinquency".
Credit and Collection Policy Defined




 In fewer words, it is a guide offering an organized
and repeatable philosophy on selling, the rules,
regulations and procedures to manage daily
operations.
 The goal for a credit collections plan is to clearly
define these elements so that sales and collections
employees conform to documented steps and
procedures designed to optimize your resources,
reduce credit risk, and improve overall cash flow.
Credit and Collection Policy Defined




 Along with cash and inventory, accounts receivable
is one of the most important short-term assets a
company has.
 The more predictably and effectively you can
convert your A/R, the healthier your cash flow will be.
 One of the most important factors in effectively
collecting the money owed to you is through
consistency.
Credit and Collection Policy Defined




By having a formalized plan that your employees
fo llo w a n d by do c u m e n t i n g a ll s te ps a n d
communications along the way, your team will be
much more consistent, effective, and efficient in
collecting outstanding account receivables.
Credit and Collection Policy Defined



well written credit and collection policy will:
A
o
Ensure continuity in the department in the event that key
personnel leave the credit department.
o
Make sure all customers are treated fairly.
o
Ensure consistent credit decisions are being made.
o
Be used as a training tool for new sales associates and the
credit and collections team.
o
Be used to ensure consistency of procedure and execution
between the credit department, sales, and management.
Credit Functions and Process Flow





Credit procedures and practices vary from company


to company depending upon many factors such as
the over-all company policies, organization, functions,
objectives of the credit department and industry
practices.
 Business establishments tend to follow similar
practices depending upon the industry they are in.
Credit Functions and Process Flow






Routine functions performed by credit personnel:
1.
Checking orders for credit. Some companies set limits
beyond which special approvals are required, thus only few
orders are referred to higher authority for approval.
2. Checking discount. This facilitates collection of unsecured
discounts deducted from customers' payments.
3. Checking credit ratings. This updates the credit standing of
customers at all times.
Credit Functions and Process Flow






Routine functions performed by credit personnel:

Evaluating credit risk. This is the core of credit granting.
4.
5. Filing information functions. The credit files are the heart of the
credit system and are kept confidential at all times. Available credit
information is a big help in handling credit and collection problems.
6. Documentation and collateralization. Checking the documents
and the pledge collateral for the loan.
7. Updating credit information. The need for up-to-date credit
information is very vital.
Credit Functions and Process Flow






Routine functions performed by credit personnel:

Response to credit inquiries. The basis of a good exchange of
8.
credit information is reciprocity. Inquiries must be handled promptly
and respondents should be aware of libel laws.
9. Collection. Credit and collection department should have definite
collection policies.
10. Customer relations. One of the basic objectives of credit policies
is to maintain good customer relations. Credit department
personnel are involved, one way or another, with customers either
through correspondence or direct contact.
 Credit Functions and Process Flow






Operations in credit procedures and practices:

1. Credit application and interview
2. Credit investigation and appraisal
3.Credit evaluation, recommendation and approval
4. D oc u mentati on , loan or produ c t releases an d
collateralization
5. Collection, release of collaterals and documents
Elements of an Effective Credit and Collection Policy
















Establishing the basic framework for the extension of

business credit is vital to the long-term success of any
organization regardless of its size.
 A sound credit and collection policy will facilitate greater
levels of sales, foster stronger relationships with your
customers and above all protect your investment in
accounts receivable.
 These are the key elements to be considered and
implemented:
Elements of an Effective Credit and Collection Policy













1.

Purpose of the policy


The

purpose of the policy should be the establishment of
the basic framework for governance of the plan. Sub-
sections will describe in specificity the details of the policy.
2. Objectives

Metrics should be defined which will provide the basis for
policy effectiveness.
Elements of an Effective Credit and Collection Policy













3.


Credit limit authority

Establish

levels of authority varied by sales volume. An
organization's risk tolerance should largely determine the
thresholds of authority at each level elevating ultimately up
to senior financial management and principals.
These authority limits should be given thoughtful
consideration as improper implementation can unduly
delay the credit approval process leading to lost customers
and sales.
Elements of an Effective Credit and Collection Policy















Credit evaluation

4.
This

step is typically handled at the analyst level. Data
sources such as the NACM National Trade Credit Report are
a valuable resource providing credit and risk managers with
a unique illustration as to how potential customers are
paying other trade creditors.
Elements of an Effective Credit and Collection Policy















Credit evaluation

4.
Data

received from such sources should be incorporated
into your decision model providing a basis for the ultimate
decision on whether to extend trade credit and the
establishment of a limit. If the credit limit sought by the
prospective customer is below a certain threshold, this
information may be sufficient in making a credit decision.
Elements of an Effective Credit and Collection Policy













5. Credit limits




are many schools of thought on how best to establish credit
There


limits. A balanced approach should take into consideration the:
a) Customer's anticipated purchasing volume.
b) Customer's payment history with other trade creditors.
c) Customer's statement of cash flows.
d) Customer's balance sheet and overall financial condition.
e) Condition of the customer's market and industry.
Establishing the limit may be somewhat subjective, within certain tolerances, based upon
any combination of the criteria measured.
Elements of an Effective Credit and Collection Policy















Terms

6.
Establishment

may largely be dictated by the norms of any
given industry sector. Weekly terms may be customary in
certain industries whereas seasonal terms may be the
norm in others.
Elements of an Effective Credit and Collection Policy















Terms

6.
Regardless

of the terms that are established, it is imperative
that these terms be uniformly adhered to from the outset of
the relationship with your customer. Your customers may,
and probably do, have internal policies on when and how
frequently trade payables are processed, so requiring a
customer's compliance from the start is critical.
Elements of an Effective Credit and Collection Policy















Account review


7.
Establishing

the limits and terms is not the end of the game.
Policies regarding the periodic review of your customer's
credit worthiness should be instituted. In addition to the
usual tracking of a customer's aging, creditors should
implement a plan to review a customer's credit at regular
intervals such as yearly.
Elements of an Effective Credit and Collection Policy















Account review


7.
This

procedure may include having the customer complete
an updated credit application which may alert you to
important information such as a change in the legal
composition of the business.
Elements of an Effective Credit and Collection Policy















Collections


8.
Despite

the establishment and implementation of a sound
credit policy, a percentage of your customers will ultimately
be unable or unwilling to honor their commitment. It is,
therefore, important that a procedure be established on
how to address these situations.
Elements of an Effective Credit and Collection Policy















Collections


8.
An

approach that begins with a friendly reminder at the
early stages of delinquency graduating to a final demand
should be considered. It is important to remember that the
more an account ages the less likely it is to be collected.
CONCLUSION
A credit and collection policy can create a structured environment that
safeguards one of the organization's most important assets, its
accounts receivable. To achieve the organization's goals: The policy
must be a living document, routinely updated in response to the
changing economy, market conditions, and the competitive
environment. It must be applicable to all customers, with limited
exceptions. It must incorporate the needs and help to accomplish the
goals of management, finance and sales.