Writing a Credit Policy

Creating a process document of any sort tends to upset some people; given the relevance this has in structuring and determining to way in which a credit function will operate it’s vital to keep it simple and easily understood.

Any credit policy needs to consider the company’s activity and market if it is to work effectively and must be drafted sensibly. There is little point in imposing rules no-one will follow. Before setting down to draft a policy document therefore, get to know what current processes are and where strengths or weakness is evident.

An effective policy will set out the objectives of the Credit Department in minimising delinquency percentages and values, retaining bad debt to acceptable levels while primarily assisting Sales and Marketing areas in achieving incremental profitable business.

Utilising sound credit practices and available information, the credit department shall endeavour to find a suitable basis for doing business with customers that desire to purchase from the company.  The decision as to what constitutes a suitable credit basis rests with the individual credit department within parameters set.  

If you have an intranet system that can be shared by the company, ensure the policy is made available. If this is not possible, ensure a copy is passed to anyone attending induction courses on joining the company. Review the policy frequently and ensure any changes recorded are made known to everyone. A credit policy will cover general headings such as collection, credit risk management, monitoring, sales and marketing support, client relationships, reports and approval levels, bad debt provision and write off, credit insurance and internal service level agreements. It is preferable for example to create a broad summarised policy open to all within the company but supported by a more detailed process policy shared with senior management and finance.

• Consider drafting a simple policy, retaining a more detailed working policy that for example goes into the nitty-gritty of processes for use solely within Credit and perhaps Finance. Once you have completed the summary policy, publicise this across the company and make sure everyone is aware of it. Far too many Credit people tend to consider credit policy the preserve of credit and finance. Everyone in the organisation must know the basics. The summary version should include a mission statement and set out its purpose, scope and indicate levels of responsibility.
• The policy document should detail how new accounts are processed and on what terms and conditions business will be conducted. Each new account should preferably complete an account application form and agree terms before trade commences. Although references are not generally taken up, these can still be provided on the application form for future reference.
• The policy should indicate that all accounts will go through a formal credit checking process to evaluate the risk of doing business and that systems will ensure continual checking at frequent intervals, at least once in every twelve months. If receivables are credit insured, ensure compliance with policy administration requirements
• The writing and review of credit lines and authorisation levels should be clearly set out in an approval matrix. The matrix should also indicate who is responsible for suspension of fresh delivery and detail the circumstances leading up to suspension. The matrix should also incorporate the ledger write-off value permissible.
• The criteria for creation of bad debt provision should be clearly listed. Generally, 100% should be provided for insolvent debt and debt with third party collectors or lawyers. A general provision should then be applied in line with historical/expected losses. Avoid over-elaboration and keep this simple as provisions have a tendency to be questioned by finance too often
• The Credit policy should detail the company’s collection policy in terms of setting out the process of calls, when they are made, the frequency of calls, query progression and dispute resolution. Each open line item should be “touched” by a collector to ensure optimum coverage. It should also cover dunning (collection) letters and the time permitted before accounts are passed legal. Policy should also ensure all aged “buckets” are reviewed weekly/monthly. It is worth considering setting a target percentage for all past due debt one day plus. Individual and team cash and aged bucket targets should be incorporated into policy
• Policy should outline and describe monthly reports that will be produced and to whom these are circulated. These should incorporate at least monthly aged debtor schedules perhaps by invoice and due date, a separated report on major debt 90 days past due, monthly bad debt provision, a running schedule of bad debt as a percentage of sales and a historical debtor analysis report. The number of reports produced will depend on the needs of the business and of course the software system operated. One can extend for example to uninsured risk schedules, open item line counts, unused credit, new credit offered and review of disputed items by specific dispute codes.
• Where there are Service Level Agreements in place (SLA’s), these should be appended to the credit policy. Cash targets set should be outlined and recorded and response times to new account processing and workflow release of orders should be noted
• Policy should stipulate who is directly responsible for writing the policy and any minor adjustment or change needs to be advised to all; more so in the case of Sarbanes Oxley and more general compliance. 
• It should be made clear within credit policy that decisions on credit lines and collection action are taken independently and are not influenced by any other external source. This is an extremely important element often omitted and ensure complete impartiality in managing credit, in other words, actions are not driven by anything done by another supplier to your client.
• Above all, ensure policy incorporates the extent of Credit involvement in business development and the use of systems data to encourage and promote incremental and higher return business.