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A Credit Policy Manual should provide rules and guidelines on important aspects of the work being performed within the credit department.  The reason for the manual is to recognize and understand important issues, and to insure consistent thinking and action on these issues by people inside the department. 

One of the fundamental things to remember is that the work being done by the Credit Department will affect many people and departments within the company; and because of this, it is vital that the manual be written only after mutual agreement of polices from management, sales and other affected departments.   It may sound like politics, but the more people that agree with the policies, the easier it will be use and be guided by them. 

Many people will tell you that it is best to only have a small list of policies and to keep those policies very general in nature.  The reasoning is that the Credit Department is faced with a staggering range of situations and it is best to allow the people faced with these situations to use their knowledge, skills and expertise to solve the problem rather than to always depend on a policy.  I understand that line of reasoning, but I also know that well-written policy manual can be of immense help to all members of the credit staff as well as to all interested parties outside of the department.   

For the most part, credit policies will not change very often; however, the manual should be reviewed annually to insure that it is up to date and reflects current thinking, including contributions from management and the other effected departments as mentioned above. 

No two companies will have the same list of credit policies; however, the following sample manual represents a good base of policies to start with. 

MISSION STATEMENT:  The Mission Statement will allow you to summarize the overall purpose of the department.

Example: The Credit Department’s mission is to help sell the company’s products and services to all qualified customers while providing the best possible credit and collection services that we can. 

CREDIT PHILOSOPHY: Some companies will find it important to define what the company’s philosophy toward credit is.  This will help those inside and outside the department to understand why things are done the way they are.

Example:  The Company develops, markets and sells products within the home entertainment field.  These products are generally high margin and short shelf items.  Because of the product and the nature of the industry, company management has maintained a credit philosophy of being liberal on sales and conservative on collections.  This means that the company is willing to accept a larger degree of risk in order to make our product available to a wider audience. 

CREDIT DEPARTMENT GOALS:  Working with management, the credit department will outline the important goals for its staff.  This can be done by either listing specific goals or by making the goals more general in nature.  Then you could send out letters to your staff as the goals change. 

Example: Every year, Credit and Management work to establish new goals for the coming year.  These goals are based upon many factors, including the company’s credit philosophy, sales and financial requirements, competition, our endeavor to move into new markets and the overall national economy. 

The company has established the following goals:  DSO of 45 days.  Maintain 68% of A/R in the “Current Aging Category”.  Maintain less than 2% of A/R in the “90+ Aging Category”.  Bad Debt write offs should be less than 1.5% of yearly sales.  All past due customers should be contacted when invoices are 15 days past due.  All orders are processed by computer, but any held orders should be reviewed and processed within 1 hour. All accounts should be reviewed once a year and all accounts with a credit line greater than $100,000 should be reviewed once every 6 months. 

CREDIT STAFF & RESPONSIBILITIES:  It is important to know who the Credit Department reports to, what the major positions are within the department and what their responsibilities are.

Example:  The Credit Department reports to the VP of Finance, who in turn reports to the President of the company.  There are 4 staff positions within the Credit Department. 

Corporate Credit Manager: The Credit Manager has overall credit and collection responsibility for the Credit Department.  The Corporate Credit Manager has the authority to approve credit lines up to $500,000.  Anything above that would need approval from the VP of Finance.

Regional Credit Managers: The Regional Credit Managers have credit and collection responsibility for their respective divisions.  They report to the Corporate Credit Manager.  The level of authority is determined by the Corporate Credit Manager, but under no situation will the authority to approve credit extend more than $100,000.

Collection Specialist:  The Collection Specialist assists the Regional Credit Managers with collection work.  Generally the Specialist will work on small dollar collections or deductions. 

Credit Investigator: The Credit Investigator assists the Regional and Corporate Credit Managers investigate the credit worthiness of new and established accounts. 

CREDIT MANAGEMENT POLICIES:  This section will provide a variety of policies on the credit function, including terms, new accounts, applications, credit investigation, credit reports, setting lines of credit, etc.

Example:  All customers must apply for an account by filling out and signing a credit application.  The credit department is required to investigate the creditworthiness of each new applicant by obtaining bank and trade reports or by pulling a credit report from a Credit Reporting Agency or from an Industry Credit Group.  The Regional or Corporate Credit Manager will assign a credit line based upon the information obtained.  If the amount requested is greater than $50,000, the customer must submit a current financial statement.  The company’s authorized credit terms are Net 30.  Any variation of these terms would need to be approved by the Corporate Credit Manager and the Sales Manager.

Customers are authorized to receive products and services as long as their account is current and within the line of credit.  If an order is placed that brings their balance higher than the line of credit, the account must be reviewed by either the Regional or Corporate Credit Manager and a decision made to allow the sale. 

COLLECTION MANAGEMENT POLICIES: This section will provide a variety of policies on the collection function, including when to contact customer, contact methods, selling to past due customers, how to handle collection problems, assigning accounts to collection agencies and bad debt write off, etc.

Example:  The Credit Department will collect all outstanding A/R within a timely manner.  Customers will be contacted once an invoice is 15 days past due.  All contact is to be made by phone and will take place in a responsible and respectful manner. 

Orders will be held once an invoice is more than 15 days past due and can be shipped once a positive contact has been made with the customer.  However, if a customer places an order while having an invoice more than 30 days past due, the order cannot be shipped without payment being made.  If a customer places an order while having an invoice more than 60 days past due, the order cannot be shipped until payment is received.  Invoice deductions should be worked just as diligently as a past due invoice but orders shall not be held based on deductions alone.

If a customer is unable to unwilling to pay their outstanding balance, the Credit Department should consider placing the account with an authorized collection agency or collection attorney.  Placement can only take place if approved by the Corporate Credit Manager and the Salesman assigned to the account.  The VP of Finance can over ride all decisions.

Non paying accounts can be written off to bad debt only after the customer has filed for bankruptcy, gone out of business or has been placed with a collection agency or collection attorney and no payments have been received for 6 months.  

INFORMATION MANAGEMENT POLICIES:  One of the most important things the Credit Department can do is to keep people informed about various aspects of the operation. 

Example:  Management is to receive monthly management reports on the overall status of the department.  Sales Account Managers are to receive summary reports on their customers.

ADDITIONAL POLICIES

Additional policies can be identified for issues such as credit laws, the exchange of credit information in order to obtain bank and trade experience, record keeping, credit organizations, customer visitation, travel, interaction with other departments, international credit, security, etc.  These issues are important and should be dealt with in the manual.