Don’t flex your muscles to collect overdue accounts. Flex your credit policy instead!
A credit policy is more than just a document; it is a simple way of saying: “This is our preferred way of doing things, and this is how we do them.” To maximise collections of overdue accounts, this is absolutely a brilliant tool when used with a bit of pizzazz.
In effect, a credit policy can ensure a fast, efficient and effective facilitation of sales, through robust risk management procedures.
A credit policy definitely does not need to be a long-winded document. At its most basic level however, make sure to include at least five key areas of credit management:
- Mission and Credit Objectives / Goals
- Cultivating Relationships
- Evaluating Credit Risk
- Collections Management
- Credit Reporting
Many credit managers probably don’t enjoy writing or reviewing policies and procedures. And when it does need doing from scratch, they might just wing it or put it in the too-hard basket.
But what if we looked at it from a different perspective?
Instead of blindly following a directive to write or review a credit policy, let’s approach it by asking yourself questions. As a credit manager, consider the benefits a credit policy delivers to the various stakeholders, and especially your credit team.
Some of the benefits your credit policy delivers may include the following:
- Provide direction, structure and ways to protect the accounts receivables ledger
- Aligns credit KPIs with a common business goal
- Stronger internal communications and relationships when using a collaborative approach
- Provide transparency on the credit process and procedures
- No ambiguity on roles and responsibilities
- Act as a backbone to credit decisions in stop supply and legal recovery
- A clear outline of criteria for evaluating and granting of credit
- An aide to shape customers’ payment behaviour
- A support to Terms & Conditions of sale
- Mitigates credit risk by defining the type of securities relevant to industry/organisation/customer segment
From these benefits it is easy to see that a credit policy can be regarded as the pillar of the credit function. In addition, it is a robust tool in supporting the decision-making process when approving or rejecting new accounts, and managing stop supply of overdue debtors.
Here are 3 ways to incorporate the strength of a credit policy.
3 Ways to flex your credit policy
Using communication as a tool, your credit policy can be positioned to act as a proactive measure in managing overdue accounts.
Instead of seeing it as a static document that will suffice for 12 months, consider it a dynamic force of support to strengthen your cash flow position.
1. Educate new customers from the start
- Allows your organisation to set the tone
- Informs customers of boundaries
A great place to start is connecting with your new customer at the onboarding process. Once an account is approved, include relevant communication as part of their welcome letter. If there are exceptions to the rule with regard to trading terms, make a personal phone call and advise them.
2. Show consistency in your decisions
- A Collection Procedure should clearly outline decision criteria.
- Be consistent when taking action at the right step of the process.
Below is an example of a collections process. The top bar outlines the overdue period in days past due. Whilst the bottom section outlines the relevant action that accompanies that stage.
3. Cultivate Relationships
- With Sales and Service: Collaborate on the credit policy
- With Customers: Maintain transparency on decisions
Taking a collaborative approach in creating a credit policy, allows credit managers to take into account the impact of credit decisions on other departments. Bringing cross-functional understanding into the credit process, will enhance not only a positive result in cash flow but ultimately the customer experience.
Changing the cash flow trend
On average, it takes 3 months to change your cash flow position if employing the above 3 strategies. This is necessary in order for existing customers to be re-educated into how you want them to behave. That is not to say that the preceding preparation period can be discounted. Customer communication is a sensitive task and should be managed with absolute professionalism, the right intentions and with the utmost respect for the customer.
If you found this article interesting you can subscribe and follow my credit blog My 2 cents worth and stay up to date across credit topics in personal & leadership development, the neuroscience of conversations, and practical credit skills.