Credit Policy Supplement

Feb Supplement 05 5/1/05 2:55 pm Page 1
CREDITPolicy
Credit Management Supplement in association with
Includes templates for:

Credit Management Policy document
Credit Management Procedures document
This supplement was issued

with Credit Management
magazine in February 2005
To help you implement a framework for your department

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Contents
CREDITPolicy
published by the ICM in association with
Introduction
One of the most regular questions to cross the technical desk at the ICM is: “I need to write a credit policy -
where do I start?” This is, of course, not the most straightforward of questions to answer. There are many text
books available that address the topic, some of which the ICM recommends and which are offered through its
Bookshop (see page xxx). However, we are often asked for an ‘at-a-glance’ guide which gives a framework
of the important areas to consider, irrespective of industry, or the type of business being carried out.
Until now, the ICM’s guidance to people making an enquiry on this topic refers to Credit Policy, an article
written by ICM Council Member Paul Stevenson. This article is still relevant today, although it was first
published nearly 10 years ago! However useful the article may be, the time is now right to expand on its
content. This guide seeks to do just that, and who better to write it than Paul Stevenson himself?!
The content of this supplement is divided into two documents, Credit Management Policy and Credit
Management Procedure. It has been structured in such a way that anyone looking to implement a formal
framework within their department can use both documents as templates for a successful operation.
The ICM is grateful to Paul Stevenson and to Experian for its support in this project. Rob Beddington, Editor
Establishing a secure platform - an overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Credit Management Policy . . . . . . . . . . . . . .8 Credit Management Procedures . . . . . . .22
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Purpose, operation and amendments . . . . . . . . .23
Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Telephone credit control . . . . . . . . . . . . . . . . .26
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Investment levels (credit limits) . . . . . . . . . . . .30
Responsibilities . . . . . . . . . . . . . . . . . . . . . . . .10 Sales ledger . . . . . . . . . . . . . . . . . . . . . . . .31
Principles of operation . . . . . . . . . . . . . . . . . . .11 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . .31
CREDITmanagement is the Journal of the Institute of Credit Management

Paul Stevenson FICM
In 1994, after 26 years as a credit manager working in various industry sectors, Paul set up
his own consultancy in receivables management. Quick to recognise employee/system
weaknesses, and with the ability to evaluate and adapt the existing structure to address these
areas, Paul has achieved significant improvements in company performance. This has resulted
in the credit departments he has been involved in becoming major contributors to profits.
CREDITmanagement Editorial and Advertising contact details

Telephone: 01780 722910 Fax: 01780 721271
E-mail: editorial@icm.org.uk Website: www.icm.org.uk
3
Reproduction in whole or part is forbidden without specific permission in writing.
Credit Supplement
Cm
Establishing a secure
platform - an overview
Paul Stevenson introduces the importance of implementing and maintaining policy and procedure documents
in the credit department. Both are vital to the performance of an effective credit manager.
T he granting of credit in trading has

been prevalent for centuries if not
millennia. The very act of selling
goods one day and receiving payment at a
later date has been the basis of business
not treating the collection of outstanding
debts as a priority in business has resulted
in more companies becoming insolvent
than any other single reason. Statistics
constantly show that company failures have
since business began and traders an element of imbalance in
The very word
have always used credit as a tool favour of innovative technology
to bargain with; to negotiate better
“control” is rather than on financial stability.
prices and to maintain customer emotive and has What I have attempted to
loyalty. It has been a balancing connotations of achieve in supporting a formal
act between the need to trade inflexibility. credit policy and credit procedure,
successfully and profitably, and is to indicate that this specific
the necessity to have funds available to pay area is available to the credit professional
suppliers. and, if implemented, will guide him or her
As we have moved forward into an age in a direction which should improve financial
of intense technological advances, less stability, even if the business is dominated
emphasis has been made of the need to and driven by sales. It will also forge a firm
control the granting of credit. Consequently system of management that will educate
there have been some spectacular crashes internal customers as to the responsibilities
of companies seduced by the need to sell of the credit function.
more product to any customer, at the
expense of failing to ensure that the customer What’s in a name?
is a fair trade risk and to recognise that At the outset, setting the right image in an
funds need to be collected efficiently. In organisation can benefit an individual and
fact, there has been, and in some cases still so too a department. The title "Credit
is, a distinct lack of enthusiasm to challenge Control", so often adopted by businesses as
customers to settle debts that are due for the means by which the department that
payment, in the mistaken belief that to do "collects the money" is described, can
so would lose the business. This action of induce resentment in individuals within the
4
Cm Credit Supplement Credit policy and procedure - overview
company who take the title too literally. where the best course of action for the
The very word "control" is emotive and has company is ignored.
connotations of inflexibility, which should Credit must also ensure that customers
on no account be the style of the credit are satisfied at all times with the trading
department. Flexibility - the means by relationship and, if there are disputes, these
which negotiation can take place must be resolved to the satisfaction
both internally and externally - is These decisions of both parties. Credit should be
a vital tool for the successful should never be aware at all times with whom the
credit function. The department allowed to satisfy company is trading and there
should be judged not on how should be access to signed and
a sales or a
it controls credit but on how it properly filed documentation,
successfully manages credit for
finance whim. such as contracts, orders etc., to
the company. Adopting the title "Credit enable Credit to base their decisions on
Management" sets the correct basis on which sound information.
the department can develop as a useful team There must be a secure and reliable
member within the organisation, working platform on which Credit can place its trust.
closely with sales, production, marketing, Part of this platform is the availability of
customer services etc., and not just reliable information and secure systems.
remaining solely as the department that Credit has a leading role in building secure
collects the debts. Indeed, the credit function systems and one aspect is to ensure that
can have a myriad of roles to play in the there is an acknowledged credit policy and
successful running of a business as will be procedure in place.
seen later. However, to achieve a successful
credit operation, the credit professional Internal customers
should differentiate between systems and The majority of misunderstandings between
actions that affect the external customers Credit and the internal customers of the
from those that affect the internal customers credit function are mainly due to a lack of
of the credit department. communication between the parties. Each is
not fully convinced that the other has the
External customers best interests of company's future at heart.
Credit management, in the way it handles There is always the thought that the other
the customers of the company, is department is operating to its
an extension of customer services. There must be a own advantage, looking for the
To say that the credit department secure and easiest solution that may benefit
(Credit) should come under and reliable platform them personally, but not neces-
report to sales or to finance, on which credit sarily the company as a whole.
causes a conflict of interest In other words, empire building
where commercial sense can be -
can place its trust. within each department, without
and sometimes is - ignored. All credit the broader approach to the company. In
decisions must be considered commercial these cases there is no formal direction,
decisions. These decisions should never be apart from budgets and revenue targets and
allowed to satisfy a sales or a finance whim, one is never sure if these are distributed ➥
5
Credit policy and procedure - overview Credit Supplement

Cm
and understood by everyone! In this age of understood, what has been communicated
emails, one would think that there would be and is going to act effectively. Responsibility
no excuse for not being able to communicate cannot be abdicated by relying solely on
with everyone in an organisation. But this is e-mail as proof that one has informed the
a fallacy. There is just too much reliance on right people, without checking that they
sending an email to resolve an have understood and acted upon
issue. One can check that the Without a formal what has been communicated.
email has been opened, but is document ... This checking procedure takes time
one sure that it has been read? there is always but it is a necessary precaution to
Worse, has it been understood? ensure that all internal departments
room for
Also, has the reader appreciated are moving forward in the same
that the sender has the authority
disagreement ... direction. Nothing can pull a
to issue the e-mail in the first place? One company apart more quickly than all
has no idea whether the comments have departments enthusiastically pulling in
been "taken on board" and one does not different directions.
even know whether the reader will act on One aspect of moving in the same
the e-mail, if action is required. There is direction is that all departments should
therefore a need to ensure that information know which departments are responsible
is acted upon both by Credit and its internal for what actions i.e. who does what. Once
customers in order that the company's again this is where the importance of having
largest asset is secure at all times. Methods a fully accepted credit policy and credit
must be adopted to highlight incidences procedure can benefit both the company
where appropriate action has not been and the department.
taken. Above all, other departments must There is a general misconception in
be confident that they are aware of the many businesses regarding the role of a
responsibilities of Credit. credit department within the structure of
Formalising how an individual depart- the company. In some businesses there is
ment fits into the entire company structure the mistaken belief that the current poor
and indicating its relationship to other overdue debt situation is acceptable, as
corresponding areas, can resolve the problem any undue chasing of accounts will only
of the misunderstanding of departmental do more harm than good. There are those
responsibility. Without a formal who accept that, if the company
document spelling out the
There is has developed the philosophy
responsibilities and systems of a absolutely no of the existence of a credit
department, there is always substitute for department within the company
room for disagreement and one-to-one structure, this department
misunderstanding.
communication ... should not have any authority,
Getting the message across as this will cause unnecessary
is perhaps more difficult. There is absolutely problems with customers. In other words,
no substitute for one-to-one communication the department exists on sufferance only.
if one wants confirmation that the person one This attitude has inevitably developed
is communicating with has heard, let alone through a misunderstanding of the methods
6
Cm Credit Supplement Credit policy and procedure - overview
and responsibilities available to the credit

department and indeed the calibre of the
staff that has in the past, staffed these
departments. Whilst it is not in the scope
of this article to suggest what training is
The Institute of Credit Management
necessary to support the credit department
(ICM) is the largest professional credit
adequately, it is clear that those people who management organisation in Europe.
have become Members of the Institute of Our 9,000 members hold appointments
Credit Management (ICM) are in general in trade, consumer and export credit
far better qualified to populate a credit as well as in related activities such as
department. The employment of adequately collections, credit reporting, credit
qualified staff must therefore be taken as a insurance and insolvency practice.
prerequisite in developing the internal
structure of the department. An additional
The ICM sets the UK’s professional
standards in credit management, offering
method is to inform and educate the internal
the most comprehensive qualifications
customers of Credit. Apart from employing
in the industry.
staff of sufficient qualification, it is essential
to ensure that a suitable credit management For more information on joining the
policy is in place and it is the crux of this Institute visit www.icm.org.uk
publication to suggest a format that could
be used in your company. This policy
1
Page
July 2004
pm
4:50
1/6/04
2004
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agement
CREDITman al of the
Institu
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Manag
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raper Page 36 CREDITmanagement

November 2004
should explain the responsibilities and

CREDITmanagement
- building
Journ
Journal of the
s
Inspire other
Institute of
Credit Managemen
t
Debt Sale - market

It’s come a longmarket
way
round-up
Page 34
objectives of the department and how

s start stirring
Journal of the Institute
credit management interlocks with other
Dormant Page 26
Page 28
Agency workers sting
a legal Page 30
Wasps with
Doing it by the book
forth in Scotland
of Credit Management
Employment law
Page 32 Page 28
Moving
2
- part Well they would, wouldn’t
Page 38
they?! Claims 34
Report writing Page 40 e feature,
pageagainst auditors
of goods - Debt
Purchas Page 30
Delivery page 25 The Scott Report
areas. Once drawn up, the policy should

feature,
Ratings All right on the night
Country Page 36
this issue:
Also in
Also in this issue:
New Sector Focus
feature, Page
27 - DSO analysis,
Page 32
be cleared by the Board of Directors and Editor &

signed by the Chief Executive Officer of Advertising Manager Rob Beddington
the company. It should be issued as a
Company Policy and be available on the Production Lena Milner
company's Intranet for all employees to
Publisher:
read.
Institute of Credit Management
In the following Credit Management The Water Mill, Station Road
Policy and Credit Management Procedure South Luffenham, Oakham
documents, explanations are shown in italics. Leicestershire LE15 8NB
I should emphasise that the entries cannot Email: editorial@icm.org.uk
be regarded as sacrosanct, as companies will
have different needs and therefore different Subscriptions UK £55
Overseas £65
methods of operation. But the basics are
there and can be manipulated to suit the The mark ‘Credit Management’ is a
needs of most companies that wish to registered trade mark of the ICM.
adopt a formal policy and procedure.
Paul Stevenson FICM
w w w. i c m j o u r n a l . o rg
7
Credit Supplement
Cm
Credit management
policy
Paul Stevenson offers a structured solution to setting out a formal
policy document for your company.
Purpose positively at the assets of the company and

To define the credit management function, effectively giving notice that it too can be a
stating the objectives and responsibilities of profit centre. By analysing the sales profile,
the department, in order that the principles greater risks can be allowed on sales that
of operation of credit are clearly recognised produce greater profits; by allowing the
and understood by the internal credit should be sales department to extend credit
customers of credit management.
pointing sales to and negotiating a price to reflect
The purpose of any policy this extension, sales can be
needs to be clear and concise in
the more secure increased; by assessing the risk
order that the concept is grasped customer. value of each customer, credit
by those who are not aware of the impor- should be pointing sales to the more secure
tance of the efficient management of credit customer and encouraging sales to sell
within the company. Therefore the purpose more in this area; by adopting a pro-active
should be short and should explain why the approach to collections, a more flexible
policy has been drawn up. This should method can be adopted where disputes are
inform those outside the credit function of surfaced earlier than previously and
the aim of the policy. resolved to the satisfaction of both parties.
credit management and customer care
Functions should not be poles apart. A function of
The function of credit management is to credit should be to ensure that it assists
maximise profitable sales, through the customers to settle amounts before these
prudent extension of credit, the balancing amounts fall into an overdue situation.
of financial risk and the efficient collection
of sales income within a framework of Objectives
customer care. The objectives should remain constant and
This is probably the most important separate from the departmental annual
statement within the policy document, as it objectives developed each year to give
clearly states why the credit department specific direction to attain company targets
exists. It gives a very clear indication that it is and goals. The following objectives are the
not a negative news giver, as has previously constant markers by which the Credit
been the case with some credit departments department should be judged and should
in the past. This department is looking reflect the best practice known at the time
8
Cm Credit Supplement Credit policy
of the development of the policy. These can company has helped to trade out of a difficult
be changed as and when required, for period is more likely to remain loyal to you
example when new technology is introduced. than to your competitors.
iii) Ensure that the cost of providing the
The primary objectives of credit management goods/services on credit terms is at a level
are to: that maximises turnover with the minimum
i) Ensure that all amounts due are collected of risk.
according to the agreed payment terms and Underlying costs of the support functions
that the most efficient methods of payment can eat into the profits of a company unless
are used. controlled. It is therefore essential that the
All outstanding debts should be collected credit function is aware that the cost of
before they become overdue if at all possible. providing the credit service is at a level that
In the case of large values, the credit does not unduly affect the profitability of
department should not wait until the debt is the organisation. For example, is it prudent
overdue before speaking with the customer. to spend time and money unnecessarily
Pro-active contact has been proved to be a credit vetting all customers if there are very
benefit in forging positive relationships with few bad debts due to the type of business
customers to the benefit of both parties. undertaken? The credit departmental costs
Disputes can be surfaced and resolved more should be monitored at all times to ensure
quickly; financial difficulties can be identified that there are adequate resources available
earlier and measures put in place to secure to maintain an efficient operation in relation
a continuation of trade. Different methods to the costs involved.
of payment should be explored and those iv) Ensure that monthly cash collection
beneficial to both parties should be intro- targets are achieved.
duced so that payments are received before One of the major objectives of the
the debt becomes overdue. department is cash collection and the
ii) Identify high risk or marginal customers maintaining of a steady improvement in the
at an early stage, especially those likely to receipt of payments, based upon monthly
get into financial difficulties and to take sales. I will mention how this is measured
whatever action is thought necessary to later, but there is no doubt that credit con-
safeguard further sales to those customers. trollers involved in the collection of payments
With constant credit vetting and pro- work more efficiently when individual cash
active contact with customers regarding targets are set and their progress monitored
outstanding debts, early identification of and published on a daily basis. Each indi-
high-risk accounts can be advantageous and vidual target is part of the total target each
will enable plans to be put in place that month, which in turn reflects the total budget
could ensure a continuation of trade to the for the year. Any serious shortfalls should
benefit of both parties. Sight should not be quickly be identified on a daily basis and
lost of the fact that companies falling upon additional resources moved to assist in
hard times should never be written off rectifying the situation, well before the end
without an investigation as to what can be of each month.
done to assist them. Any customer that your v) Maintain a high quality of accounts ➥
9
Credit policy Credit Supplement

Cm
receivable. they are the responsibility of the whole

Ensuring that the sales ledger remains company.
as "clean" from entries that are not invoices
or credit notes is only part of the issue. All Responsibilities
under and overpayments must be resolved Over the years there have been many views
quickly. There are however the difficult on the responsibilities of Credit, particularly
customers who, for one reason or another the reporting line, which has ranged over
result in more resources being expended on various departments as fashion has dictated.
them than is necessary for their size. Ways There are however certain responsibilities
must be found to improve the situation so that cannot be ignored and there should be
that the quality of the ledger is improved. a clear indication where these lie in order
It is perhaps too much to hope for, but one that future disagreements can be resolved
measure of success would be for all cus- quickly.
tomers to pay on time without being asked i) Credit management functions within the
and with no disputes arising! responsibility of customer services.
vi) Develop a compatible working relationship In the above instance I have left the
with Sales, so that the needs of all depart- responsibility under customer services but
ments involved are satisfied to the benefit in the past this responsibility has been
of the company as a whole. with either Finance or with Sales. I believe
The final objective must be worked on that neither department truly reflects the
at all times. There is a tendency for the area in which Credit should lie. Each has
Sales department to talk of "their" cus- its own agenda in the company structure
tomers when in truth they are the customers and each can pull Credit in the wrong
of the company, not just of Sales. However, direction to the detriment of the company.
Credit must not lose site of the fact that it is The basic trading tenet is that a good
the sales force that meet with customers Credit department makes decisions that
and have to contend with confrontational are commercially motivated, which
situations that Credit may have originated. involves equal input from both Sales and
It is therefore essential that Credit keeps Finance and at no time should one depart-
Sales informed at all times ment dominate the other in the
regarding unresolved disputes ... a good credit decision making process.
and overdue situations. At the department makes Having said this, it is clear that
same time, Sales must keep decisions that are if the responsibility for Credit
Credit informed of issues that rests with either Finance or
commercially
relate to terms and conditions Sales, then caution must be
that Sales may be considering
motivated ... exercised to ensure that the
for a particular customer. It is all about correct decisions are made for the benefit
communication between these departments of the company and not made to suit the
so that each knows the current situation and requirements of a specific department.
both departments are working as a team ii) The credit manager is responsible for all
and not as individuals. Customers are not recommendations and decisions made in
the responsibility of just one department; accordance with the credit management
10
procedures. their actions (or lack of actions) on other

The responsibility for any changes made departments, particularly Credit.
to both the policy and procedures must rest
with the credit manager, who is directly 1. Customer Housekeeping
involved in carrying out the changes. Both Whilst Credit can be responsible to
the policy and the procedures should be Customer Service or Sales or Finance, in the
reviewed annually as this brings majority of cases the common
both to the forefront of people's Both the policy area is Finance. However, this
attention rather than being lost and the should not hinder a close
amongst other company proce- procedures should involvement with whichever
dures and never read. After the be reviewed department has the responsibility
amendments have taken place, for the input of the main customer
an indication must be sent to all
annually ... data that effects the invoicing of
employees of the changes. customers. Credit must ensure that the
iii) The financial director and the sales department is in the loop and is kept
director must endorse any action beyond informed and where necessary is the person
the recommendation of credit management. authorising additions and amendments to
In cases of disagreement, the final arbiter is this information.
the CEO. Responsibility for the input and accuracy
Inevitably there will be times when of data remains with the Customer Services
disagreements are so strong that arbitration department. Credit Management must
must be sought. Although one hopes that ensure that the data is correct and that any
sense will prevail in the majority of cases, amendments recommended by Credit are
where a disagreement persists, there must actioned immediately.
be a clear upward arbitration path adopted The input of information to any system
to resolve the issue to the benefit of the can reside in departments other than
company. Disputes of this nature should Customer Services, as this depends upon
never be left to fester between departments each individual company's requirements.
and all decisions taken should be accepted For example I have known cases where
as final. Credit is solely responsible for the entry of
this information and for ensuring that the
Principles of operation information is correct. Correct information
In principles of operation, which is the final is vital for trading successfully in business
part of the policy document, I have attempted but especially when proceeding to legal
to identify all the areas that affect Credit, action. An incorrect trading style will
but for which it does not necessarily have result in a legal case being rejected and the
responsibility. There are times when Credit costs incurred will be unnecessarily high.
cannot function efficiently without correct Whoever is responsible, Credit must have
information and it is vital therefore that the authority to check that the information
Credit has the power to resolve issues with is correct if entered by another department
departments that have this responsibility and be able to make changes to the data if
but who do not appreciate the effect of required and to be confident that the ➥
11

Cm
changes recommended by Credit will be In the above case I have suggested that
made. Conversely, Credit should be in the Customer Services submit the new account
loop that informs departments of what data, but this data must be checked by
changes have been made elsewhere. Too Credit to ensure accuracy. There should be
often I have seen an amendment to a trading a similar check to amendments made to any
style, adding ‘Limited’ to the title without of the details that affect the business and all
sufficient information to justify the entered detail must have a suitable audit
change. There should also be an audit trail trail to identify who added or amended
available to show who has changed what what information so that errors can be
data and when it was changed. easily traced to the person responsible and
additional training targeted to the correct
2. New accounts and credit limits areas. No undocumented entries should be
The company must ensure that it knows made as this could mean that any errors
with whom it is trading at all times and this entered will not be traceable.
will entail various enquiries to be made ii) Credit limits will be established at a level
outside the business being investigated. thought necessary by mutual agreement
As a start, the letterhead of the business between the Credit department and the
should be obtained, which will provide the Sales area responsible, taking into consid-
researcher with the basic data on which to eration all aspects of credit, marketing
commence an investigation. Clearly the requirements and economic trends, to
depth of the investigation will depend upon arrive at an investment level for the company
the value of the business involved and that is to be regarded as a reasonable
research may be restricted for small value credit risk.
accounts. However, the company must be It is essential that Credit and Sales liaise
satisfied at all times that it is trading with to set an investment level (credit limit) that
the correct business whatever the value. is regarded as a reasonable risk and this task
When it comes to fixing credit limits, should be completed before the conditions
decisions must be made to develop sales of sale or the contract is submitted to the
rather than restrict them. Too often Credit customer. This does not mean to say that
is accused of restricting the business by the investment level should not rise or fall
stopping deliveries to customers because dependent of the state of the economy.
the credit limit is set too low. It is essential When times get hard, the effects on some
therefore that all credit limits should be businesses will be more pronounced than
reviewed on a regular basis to take account on others. Therefore credit limits must
of movements in trading confidence. This always reflect, wherever possible, the current
is not necessarily restricted to business risk to the company. As stated above, too
information, but the economic climate must often Credit is accused of restricting sales.
be taken into account in conjunction with If credit limits are set correctly, Credit
the company information. should be pointing out the opportunities as
i) New accounts details will be submitted by to where the efforts of the Sales department
Customer Services, using standard company should be directed to increase turnover with
data input criteria. businesses that are safe, because the credit
12
risk is perceived to be low. On no account should customers be

iii) There will be a constant reassessing of allowed to continue to trade without the
the credit limits of existing customers above action being taken.
where necessary. A suitable system needs to be in place
The trading condition of businesses as that automatically informs Credit when a
well as the economy will change over time. customer is approaching his credit limit.
There must be a structure in place to There should be a link between the value of
recognise such changes and take positive orders placed by the customers and not yet
action to safeguard the company. For actioned, and the value of the outstanding
example, if there were to be a rise in VAT, balance on the account. When the sum of
this would ultimately affect the outstanding these two figures exceeds 90 per cent of
debtor level of all customers and as a con- the credit limit, Credit should be reviewing
sequence force the required credit levels the situation and bring this to the attention
higher. The Credit department must be of Sales. A decision must be made as to
aware of circumstances where reassessment whether to restrict trading to the current
of credit limits is required. limit or whether the limit should be raised
iv) Should a credit limit need to be set to accommodate the increased business. If
above that which is recommended by Credit the customer is to continue to be allowed
Management, the revised limit must be credit, without the limit being increased,
authorised by the Finance Director. then Credit must gain authorisation for
In the case of disputes, a director this action.
should authorise a level that is above that
which credit management recommends. 3. Terms and methods of payment.
In the above case I have suggested the Every company has standard terms of
Finance Director, but any director would service. Some can be very complex while
be suitable to take this responsibility, others are easy to follow. One company I
dependent on who is responsible for credit, know had a term of "10 days from receipt
provided this procedure is acceptable to of invoice". As the monthly invoices came
the company. In effect, this should not occur, from the USA and were produced over a
as Credit should be suitably flexible to move 10 day period during the second week of
with commercial considerations. But there the month following the month of usage,
will be times when higher authorisation it was impossible to be certain when a
may be required. customer would receive the invoice. As a
v) Credit Management is responsible for consequence, the terms were useless. Any
bringing to the attention of the sales area variation from the standard terms of the
responsible those customers who are likely company must be discussed and agreed
to exceed (or have exceeded) their credit with Credit prior to the terms being granted.
limits and for recommending: There are various methods of payment
a) That the credit limit should be increased and it is essential that those adopted bring
to cover the balance, the benefits to your company and not
b) That the account should be put on hold necessarily the customer.
until the balance is reduced. i) Standard payment terms will be varied ➥
13

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only in exceptional circumstances and then in a poorer performance posted each month
only after agreement with Credit than is actually the case and Credit being
Management and Sales. Under no circum- unable to effect collection to the terms
stances should terms be varied without printed on the invoices.
prior agreement from Credit. iii) It is recognised that margins are eroded
There will be times when terms may by the granting of excessive terms; therefore
need to be varied to a customer or a group a decision will be based on the merits of
of customers. This may be so that your each case.
company can obtain a market advantage The granting of increased terms can be
or to establish a foothold in a market pre- very beneficial to a company so long as
viously untapped. In most cases this will these are carefully controlled and the costs
necessitate an extension to the normal involved are monitored. With the majority
terms of your company. These should not of business on standard terms, it is vital that
be granted without agreement from both the measurement of performance each
Credit and Sales as to the parameters of month gives a clear indication as to the
the extension i.e. how long is the extension effect of extending any terms to customers.
to last? Is there an increase in price to The usual performance measurement is the
cover the cost of the extension? It is vital average Days Sales Outstanding (DSO).
that a control is maintained over any Later I will show how this calculation can be
extension to the terms offered to customers, subdivided into the best possible DSO (i.e.
as any increase will affect the DSO for the that which is governed by the terms,) as
company in an adverse direction, which distinct from the delinquent DSO (i.e. that
Credit will have to justify. There is more which is genuinely overdue). Both of these
on this point later under Procedures. DSO calculations should be used by Credit
ii) There are to be no unofficial terms granted to report performance. While Credit is
to customers. regarded as having full responsibility for the
All too often, Sales will attempt to offer collection of all debts as they fall due, it is
a customer an unofficial extension of terms, not responsible for those debts that are not
in the hope of capturing business without yet due. If an increase in the granting of
the appearance of giving anything away. extended terms is raising the total DSO for
Also there is the added advantage of the the company, Credit must clearly show
customer not being able to use your invoice where the increase lies. Credit must there-
as a tool to show competitors that the cus- fore show the best possible DSO and the
tomer is receiving extended terms from delinquent DSO in order that the problem
you. This must be resisted at all costs, as it can be identified.
not only affects the profitability of your iv) The normal method of payment will be
company but it also puts Credit in a very by cheque, bank transfer through BACS
difficult position. What appears in the (Bank Automated Clearing System) or by
books as overdue thus, cannot be chased credit card, to the terms agreed.
because of the "arrangement" agreed with Choosing the correct payment method to
Sales. The overdue figures can then be suit your business or the type of customer
over inflated by the unofficial terms, resulting with whom you are dealing, depends upon
14
the market in which you are trading. at this point in order that problem customers
However, you should always review the are identified and action can be taken to
methods of payment adopted, to determine secure the debt and ensure that whatever
which is best for a given period and security is required is written into the con-
whether there has been a change in market tract. Credit must be in a position to
forces. It should be remembered that cheques accept as much business as possible and
take some time to clear, while electronic must therefore have methods available in
fund transfers using CHAPS (Clearing order to secure the subsequent debts
House Automated Payment System) are incurred. I do not intend to itemise these
instantaneous and that banks usually methods but in cases of customers who are
make a charge for the CHAPS service. less than financially secure, ways must be
With payments made by BACS there is no found to ensure that the business can be
charge, but the transfer is not instanta- transacted in the knowledge that the resultant
neous. Credit card payments, while quick, debt will be paid.
usually carry an additional cost. Electronic
payments originated by the customer are out 5. Collection of debts
of your control while direct debit payments, i) The primary function of the Credit depart-
originated by you, remain within your ment is to collect amounts due within the
control. Direct debits take the chasing of agreed terms, before the amounts become
overdue accounts out of the credit function, overdue.
but direct debits cannot be successfully It is so often the case that the collection
implemented if there are a high number of of debts is not an initial priority and only
queries. All these factors should be assimilat- becomes so when any debt reaches overdue
ed, and consideration should also be given status. This is too late on several levels.
to using letters of credit, bank drafts etc a) The longer you leave a debt unpaid, the
where necessary. more difficult it will be to collect.
b) Any query relating to the debt will only
4. Conditions of Sale surface when you start to chase. This
i) All customers trading with the company includes missing invoices, which although
will receive the current terms and conditions not strictly a query, will still result in non-
of sale by way of a signed contract, prior to payment.
the commencement of trading. c) If the customer is in financial difficulties,
The implementation of the conditions of you will only find out when you get around
sale of the company, either by sending a to chasing for an overdue payment.
copy to a new customer on the opening of d) Credit limits are more likely to be exceeded
an account or by a formal signed contract, when a greater number of invoices remain
is essential in good business. These terms unpaid.
of trading should be clear and concise and The collection of debts must, where
should never be sent until the credit function possible, be on a pro-active basis. I have
has completed a credit check on the com- gone into greater detail as to how this can
pany. It is essential that the initial check on be achieved in the credit management
a customer's credit worthiness is carried out procedures section on page 22. ➥
15

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6. Legal action made both for bad and doubtful debts.

I) Legal action is a last resort after all other i) Bad debts incurred will be notified to the
methods of contact with the customer have Credit Manager and the Sales
been exhausted and after consultation with Director/Manager responsible, immediately
the Sales Manager responsible. either is aware of the situation. Provisions
It is always advisable to keep the Sales for bad and doubtful debts will be made by
function fully informed of this type of the Credit Manager on a quarterly basis and
action. It is a most important tool to use but additions/reductions agreed as variations
one that can have severe repercussions for with the Finance Director prior to any journals
the customer as, once this information is being raised.
made public, there could be a flood of In the case of a bad debt being identified,
creditors also requiring payment. This it is essential that communication between
could cause failure very quickly if he cannot Credit and Sales is maintained in order that
settle all the amounts due. You will need to deliveries do not continue to the customer
keep an accurate record of costs incurred by and that Credit can ensure that any product
legal action as it may become economic to still available is recovered against the debt
write-off the debt rather than go through a under the terms and conditions retention
lengthy and more costly legal procedure in clause. Reserves against bad and doubtful
order to secure payment. debts can be on a percentage or specific
There are many solicitors now offering a basis and how this should be calculated
complete service so may be economical to should be discussed and agreed with the
consider passing all small debts to them for Finance Director.
collection at a very early stage. Such sub-
contracting of resources leaves more time 8. Dispute Management
available for higher value customers. All disputes will be monitored within Credit
Management, which has the responsibility
7. Bad Debts and Provisions for Bad and to ensure that all queries are resolved within
Doubtful Debts a reasonable time. It should be made clear
There will inevitably be debts which that although Credit identifies the majority
become uncollectible for one reason or of queries, it has very little responsibility
another and which will have to be written for resolving these queries. Credit should
off. Remember that any VAT involved can produce reports which give a clear indication
be recovered in the regular VAT return. to management of the current situation of
Credit departments that have no bad debts outstanding disputes indicating how long
are possibly being too restrictive in their disputes take to be resolved, where there are
approach to risk. Conversely, those com- "log-jams" or where an abnormal number of
panies that have high bad debt losses are similar queries are being replicated.
likely to have ineffective Credit In many organisations the responsibility
Management departments. A balancing act for query/dispute resolution is not clearly
has to be achieved in order to generate as defined. As a consequence, opportunities
much satisfactory business as possible. are missed to resolve disputes in an efficient
However, it is essential that provisions are manner to the benefit of both the company
16
and the customer involved. By defining credit notes and statements can affect the
formally the areas of responsibility, it efficiency of credit. Late entry of new
becomes clear who is to do what in the case customer details and amendments can
of disputes. An efficient dispute management cause unnecessary delays. At all times the
system should be in place to measure the sales ledger function should be regarded as
duration between finding a dispute and its the foundation upon which the efficiency of
resolution so that common disputes can be the Credit department depends. Checks
identified and additional training introduced should therefore be made regularly to
to reduce the dispute level. This cannot be ensure that the data and systems are working
done until dispute levels are accurately as efficiently as possible.
measured.
11. Insolvency
9. Telephone Credit Control Credit will be responsible for the reporting
The telephone will be used to contact cus- and monitoring of all insolvencies.
tomers in descending order of outstanding Where customers become insolvent, the
balance to obtain payment to the terms with Credit function should ensure that the correct
the customer. The use of the telephone in documentation is received and completed
making successful collections is regarded as before returning to the relevant parties and
a major contributor to an efficient Credit that the company is represented at any
department. future meetings. Credit should also keep a
Too much reliance can be made on the diary of when reports are due to be received
re-active approach to collections, i.e. only on the progress with the insolvency. At all
contacting customers when debts are over- times senior management must be kept
due. This is like closing the stable door after informed.
the horse has bolted and will not necessarily
produce the benefit of obtaining future 12. Management Reporting
payments before future debts are considered Monthly reporting of debtors showing value
overdue! A pro-active approach to major outstanding, value and percentage of
customers will ensure that the matter is overdues and Days Sales Outstanding
brought to their attention before the due (DSO) (broken down into the best possible
date, thus giving them an indication that DSO and delinquent DSO,) will be used to
payments are expected on time. inform management of the current situation
and also as a method of monitoring
10. Sales Ledger Function progress within the department.
An efficient management of the sales ledger Different companies will use different
function is of vital importance in contributing statistics to measure performance but it is
to the efficient collection of debts and the the responsibility of Credit to indicate clearly
procedures involved should be comple- the reasons for any increases in the relation-
mentary to those of credit management. ship of debtors to sales. Any rise or fall may
The whole of the sales ledger should be or may not be due to the Credit department's
viewed with efficiency in mind. Delays in collection performance but be due perhaps
the printing and dispatching of invoices, to an increase or decrease in sales to ➥
17

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customers on extended terms.This is clearly company. In this ever-changing technological

not a responsibility of credit. Monthly society, we must always be looking at new
reporting must give senior management the ways of receiving information to enable the
information upon which decisions can be best results to be applied.
made for a re-direction of future business
tactics. 15. Limits of Authority
Authority limits should be set and followed
13. Cash and Performance Targets in all cases.
Monthly cash targets will be fixed and It is essential that authority limits are set
monitored on a daily basis throughout the and regularly reviewed so that, for example,
month. The primary method of measuring the correct authority levels are involved for
monthly trends in performance will be by high value credit limit levels to be authorised.
way of DSO, which will be measured at the This also applies to the authorisation of
end of each calendar month. credit notes and other financial limits that
Using historic information it is possible are ancillary to credit. I firmly believe that
to extrapolate future trends and to target responsibility should be spread dependent
future cash flow figures. This is particularly on the values involved. Higher values are
relevant to individuals within the Credit thus automatically brought to the attention
function as it remains a considerable moti- of higher authority.
vator to performance. We all like to know
how we are doing and having a target to CEO Name.................................
hit. Setting monthly targets, broken down to
individual collectors, brings a greater team Date.................................
spirit into the department.
The Policy must be signed and dated by
14. Customer payments/bank information the CEO and should become part of the
All methods of receiving of payments company's policies of operation, available
should be explored so that the most efficient for all to access.
methods are adopted for the benefit of the
company. Bank notification of fund transfers Conclusion
should be passed by electronic means so The information that I have given in this
that customers' accounts can be updated as Credit Management Policy document should
quickly as possible. Delays in the transfer set you on course to develop a Policy for
of funds from one bank to another should your own company. It is NOT meant to
not be tolerated. cover all eventualities as no two companies
The credit professional should always are the same. It may be that you would
be looking at the best payment methods to wish to drop some of my suggestions or to
suit all the transactions undertaken by the add some of your own. That is entirely up
company in whatever fields it trades. Banks to you, but what I have tried to do is to
are continually introducing new or amended bring together those areas that are the most
payment methods which might have an common in the industries in which I have
effect upon the existing conditions in your been involved.
18
Sometimes it’s nice to have a little more detail. And sometimes, Often delivered as part of a tailor-made solution that’s based
a little extra insight provides a genuine business advantage. upon our first-hand and detailed understanding of your
business, we ensure you get the right insight from the unique
Experian has always understood the importance of added-value information that we hold.
information. That’s why we go to extraordinary lengths to
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Using market-leading products developed around the most extraordinary advantage.
sophisticated business information systems you’ll find anywhere,
Call 0115 901 6013. And get more detailed information.
we supply the detail that allows you to make better informed
credit and marketing decisions.

Credit Supplement
Cm
Late Payment
Why it pays to know your customers
By Phil Cotter, Managing Director of Experian’s Business Information
division.
L ate payment is one of those topical

issues that never ceases to go away
and one on which everyone seems to
have an opinion. This is not surprising
since more than five years after the
Some late payers are themselves victims of
delayed payment by their customers, are
genuinely suffering cashflow difficulties or
maybe unwilling or unable to obtain addi-
tional working capital or extend their over-
Government brought in legislation to curb draft. As a result, they have to juggle their
late payment the time taken to pay invoices cash outflow very carefully against the cash
is still on the increase. According to received from customers.
Experian’s Payment Performance service, Bureaucracy or inefficient procedures
companies took an average of 57.5 days to can also be a factor. Payment authorisation
pay their bills in November 1998 – the year does take time and, with large numbers of
that the late payment legislation was first invoices to pay, payment has to be carefully
introduced. They now take an average of controlled and monitored. Companies are
59.5 days. In addition, the average payment also conscious of fraud, be it insider, sup-
period for large companies has increased plier or customer fraud. Here, inefficient
from 72.1 days in 1998 to 78.3 days in May systems or poorly managed systems are
2004 – an increase of 6.2 days. often the result of neglect. As the company
But why does it still continue? The grows, its procedures may not always
impact that late payment can have on a keep pace.
business is well documented and it is often Much needs to be done to reduce late
SMEs that are most likely to find them- payment and to discourage the UK’s late
selves funding other, mainly larger, busi- payment culture. But, to minimise the risks,
nesses with billions of pounds worth of there are simple steps that businesses can
interest-free loans through the late payment take to help protect themselves:
of such customers. The reasons behind late • Payment performance information is widely
payment are complex but in comparison available – use it. One of the first actions of
with the rest of Europe, the UK’s late pay- a business facing financial difficulties is to
ment culture certainly stands out as a key delay paying as many of its invoices as
reason behind its continuing refusal to go possible, paying only the most essential to
away. And, it could certainly be argued that keep the business functioning, such as
there is a core of individuals who believe electricity and telephones. Most companies
that late payment is acceptable, even a sign are, in fact, fairly consistent in their payment
of good business practice, to delay payment trends, so a slowdown in payment periods
for as long as possible. quickly becomes apparent. A look at the
Late payment can also be unintentional payment trend of most companies when
and the result of a continuing vicious circle. receivers or liquidators are appointed will
20
show a sudden sharp increase in the length cash flow and profit significantly, reduce
of time taken to pay invoices immediately late payment and minimise bad debt.
prior to the appointment. Contracts, along with Terms & Conditions,
• Know exactly who you are doing business should clearly state when payments are
with and check when, or indeed whether, due, avoiding common areas of confusion,
you are likely to get paid. Remember, over such as whether payment is due 30 days
half of all bad debts arise from longstanding after the invoice date or delivery date.
customers so it is just as important to • Ensure your business has a clearly defined
review your existing customers’ financial complaints procedure and service level for
and payment status as well as new cus- resolving complaints and disputed debts
tomers so that the appropriate steps can be quicker. Other measures such as payment
taken in the light of changing circum- by Direct Debit and discounts for early pay-
stances. For example, to reduce the ment can also help reduce the problem.
amount of credit given, reduce the payment • If proper procedures are laid down and
terms, demand some payment up-front or, kept to, the chances of late payment and
in extreme cases, payment in full before bad debts will be greatly reduced.
delivery. While some companies delay payment
• Be clever, understand and assess your cus- of invoices to aid their own cash flow in dif-
tomer base. Are you targeting the right cus- ficult times or have a dispute with the sup-
tomers? Pre-screening can be employed so plier, others have no justification. The prob-
you don’t target new business at those com- lems that late payment causes suppliers –
panies that have a poor credit rating and are and the human cost – should not be under-
late payers. estimated. Cashflow, profits and growth
• Share your information. Experian’s pay- can all be adversely affected. Late payment
ment performance data is based on the can, and frequently does, lead to business
sales ledgers of thousands of businesses failure and job losses.
and, of course, the more sales ledgers pro-
vided, the more accurate the service. This
information provides a clear picture of a Experian’s Payment Performance infor-
company’s record of paying its bills and can mation shows the payment behaviour
be assessed online through Experian’s cred- of companies, drawing on sales ledger
it report service. Remember, your own information from many different suppliers
company’s credit rating can be affected and reporting on the number of days
through late payment. the subject company takes to pay its
• Give credit management and credit man- invoices, together with the comparative
agers their due. It is a sad fact that only behaviour for the subject company’s
about a quarter of companies in the UK industry as a whole. From this informa-
have any dedicated credit management tion, suppliers can tell at a glance
function and even when a company whether a company pays its bills
employs a credit manager, the role is often promptly or appears to be in financial
subservient to the needs of sales and mar- difficulties. The sales ledger information
keting. Good credit management people, provided by participating companies
policies and procedures are crucial and enables Experian to build a payment
should never be underestimated. profile and history of each company on
• Adopt a commercial approach to payment the database. For more information,
collection during the sales cycle to improve contact Experian on 0115 9016017.
21
Credit Supplement
Cm
Credit Management
Procedures
Now that your policy is in place, you need to consider the internal
procedures to adopt within your department. Paul Stevenson’s
template will help you and your staff.
I n the following credit management procedure document I have developed the actions
that I believe are necessary in a successful credit department, which can be used not
only as a aide memoire for existing staff, but also as a training aid for new employees.
It is therefore a document used solely within the department and does not need to be
available for the whole company to access. However, should senior management need to
know the procedures of Credit, the document can be produced showing how the department
operates to a laid down procedure. Please also note that the numbering of the relevant points
should not be used in conjunction with the policy document numbering. This procedure is
purely for internal use within the credit department.
Credit management procedures are necessary to ensure that every member of the
Credit team is using the same criteria in order to carry out their own business operation.
I have not attached any detailed explanations to all the points as I have in the policy
document, as I feel the document is self explanatory. However, in a few cases I have done
so where I feel that a further detail is relevant. As before, these comments are in italics.
Credit Management Procedures - index 2.4. Attitude to the customer

1.0 Purpose, operation and amendments 2.5. Prime call time
1.1. Purpose of the procedures 2.6. Diary
1.2. Operation of the procedures 2.7. Credit control documentation
1.3. Amendments to the procedures 2.7.1. Daily telephone activity analysis
1.4. Staffing levels 2.7.2. Debtor reporting
1.5. Collection of debts 2.7.2.1 Collection effectiveness index
1.6. Collection action timetable 2.7.2.2 Weighted average age
1.7. Collection activity 2.7.2.3 Comparative ageing
1.8. Maximising telephone effectiveness 2.7.2.4 Rollover analysis
2.7.3 Cash flow forecasting
2.0 Telephone credit control
2.1. Introduction 3.0 Investment levels (credit limits)
2.2. Use of the telephone
2.3. Commitment to pay 4.0 Sales ledger
22
Cm Credit Supplement Credit procedure
1.0 Purpose, operation and amendments accounts and new customers who will need
to the procedures to be monitored to ensure compliance to
1.1 Purpose of the Procedures terms from the start of business.
The purpose of these procedures is to set c. To ensure that account queries are speedily
out the detailed responsibilities of the credit surfaced and resolved, so that the accounts
management function. accurately reflect the customers' true
These procedures will act as a guide and indebtedness, thereby optimising cash flow.
as a training aid for permanent or temporary d. To ensure that the highest possible level
staff employed in the department and for of communication and co-operation is
senior management who may be unaware maintained with Sales.
of the details of the role of the department. e. To provide management with the
information that accurately reflects the
1.2 Operation of the procedures performance of the Credit department.
These procedures have been written with f. To preserve and enhance goodwill
the size of the credit management depart- between the company and its external
ment in mind. It is appreciated that with a customers.
small number of staff working within the g. To ensure that the sales ledger customer
department, a heavy burden can fall upon information database is maintained at all
the shoulders of a small team to maintain times by the relevant department, with the
the expected standards. It is therefore correct additions, amendments and deletions
essential that the procedures are followed to account details.
as closely as possible so that, in the event
of absence, other members of staff can take 1.3 Amendments to the procedures
up the workload as quickly and seamlessly Responsibility for the maintenance of this
as possible without a serious deterioration manual of credit procedures lies with
in service to any of the internal or external Credit department. However, all credit
customers involved. staff are encouraged to improve these pro-
As stated in the credit policy, the function cedures where they see benefits to both
of Credit Management is to maintain the internal and external customers.
lowest level of receivables and to protect Suggestions for such improvements
the company's investment in debtors. To should be channelled to the credit manager
achieve these two objectives, an effective of the company.
credit function is essential and should
observe the following points:- 1.4 Staffing levels
a. To reduce and maintain the average actual In this area I would suggest that all Credit
period of credit enjoyed by customers, close staff are mentioned with titles, telephone
to the level established by the terms of sale. and e-mail details as an appendix to the
b. To ensure that all collections are under- Procedures, so that the appendix can at all
taken on a priority basis. That maximum times be brought up to date without issuing
effort is directed towards the major debtors a new procedure document when there are
and other specified accounts which are new members joining or moving from one
considered vulnerable, such as high-risk position to another. ➥
23
Credit procedure Credit Supplement

Cm
1.5 Collection of debts should be diarised forward using, say,

It is the prime objective of the Credit Microsoft Outlook Calendar where possible.
department to collect debts that are due It is essential to use past agreements or
within the agreed payment terms and comments when making follow-up calls as
before an account becomes overdue. this enforces the professionalism of the
It should be recognised that contacting Credit department in not allowing previous
customers who have not paid the amounts promises to be ignored.
due until after the due date is a reactive There are programs available that inter-
situation. Major customers should be con- face with standard sales ledger software that
tacted on a pro-active basis. will handle this information.
Therefore, the Credit department will iii) All accounts that have balances remaining
operate the following routines to collect pay- after the due date should be controlled by
ments due from customers of the company computer generated chase letters or further
who are on terms other than direct debit. telephone calls, following the month-end,
i) Every effort should be made to contact with regular reporting to the sales manager
major customers by telephone before the responsible, concerning the current situation.
due date to: Action to suspend the on-line services
a. confirm that the invoice in question has should be taken sooner rather than later
been received. If not, a copy can be sent and a date should be fixed with the Sales
immediately. Manager for the account of a customer to
b. agree the balance expected to be paid. be suspended, if no complete payment is
This will surface any query that needs to be received.
resolved before payment can be made. iv) 15 days before the customer is due to
c. agree a date on which the receipt of go on stop, the Sales Manager responsible
payment is expected. should have an update of the current situ-
Credit staff must obtain a firm commit- ation.
ment from the customer to pay all amounts v) Before the account is placed in the
due, to terms. Customers should be con- hands of a third party for collection, a final
tacted in descending order of outstanding notice should be sent to the customer to
balance with emphasis being made on give the customer the final warning that
high-risk customers and new customers, as the service is being suspended. The value
these pose the greatest risk of default. It is expected should be stated and should
not unusual to find that 80 per cent of the include the option to charge interest on
total outstanding balance is owed by only the overdue debt plus costs to cover
20 per cent of customers. Telephoning the administration.
largest outstanding balances first therefore vi) Follow-up telephone calls are vital in
ensures that the maximum potential is maintaining pressure on customers to pay
gained from this collection procedure. to the agreed terms. Using the diary for-
ii) Brief details of all calls will be recorded ward facility to record when such calls
on either a card system by customer or by should be made enables the credit con-
electronic conversation files against each troller to monitor whether promises have
customer's database and follow-up calls been kept. If no payment has been
24
received by the agreed date, he/she can method of notification.

quickly focus the customer's attention on vi) Visits
the failure to conform to the original tele- As and when thought necessary and with
phoned agreement. the co-operation of the Sales Account
Manager involved.
1.6 Collection action timetable vii) Accounts on hold
i) Invoice Accounts will normally be placed on hold
To be raised as soon after the service has with agreement of Sales unless there is an
been provided or, if monthly, no later than agreement authorised by the Credit
the seventh working day following the Manager for them to continue.
month of usage. viii) Collection agencies/legal action
ii) Statement A review meeting with Sales management
This should be sent where necessary midway to take place no less than 5 days before the
though the month and should include the month-end if a solicitor/debt collection
new invoice produced for the preceding agent is to be used to collect overdue
month, all open invoices and also payments items that are about to fall into the 3 month
received up to the date of printing since the overdue category.
last Statement. Any repayment plans to be agreed with
iii) Telephone calls the Credit Manager. Repayment deals
10 days before the invoice is due to be paid, offered should be negotiated to freeze an
all major customers should be contacted agreed figure of overdue debts, which are
by telephone to confirm invoice receipt, to be paid off on a weekly basis at a set
agree the balance to be paid and the date amount plus interest and an agreement
of expected receipt of payment. The credit reached as to which month's service will be
department must obtain a firm commitment paid to terms. This should be reviewed
from the customer to pay all amounts due. each month and payments chased in the
Customers should be contacted in out- normal way.
standing balance order, taking the largest
balances first and concentrating on known 1.7 Collection activity
high risk and new customers. The principal collection activities are:
iv) Chase Letters • telephoning customers;
First notice should be sent out at the • sending out chase letters and final fax or
beginning of the second month following email when necessary;
month of usage. Second notice should be • maintaining records of telephone calls and
sent the following month. The final notice payments;
is sent at the beginning of the next month. • detecting queries and overseeing their
v) Faxes or email resolution;
Fax can be used where telephone contact • alerting Sales Management if any customer
cannot be made and in the final contact on is not paying in a timely manner.
the suspension of future usage of the system, • providing management information
i.e. at the end of the third month, when a concerning the Credit Management activity
Fax or email should be the preferred through regular reports.
25

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1.8 Maximising telephone effectiveness • If part of an invoice is under query, request

Obtain all relevant source information. partial payment covering the un-queried
• Ensure that the information is accurate portion.
and up-to-date. • If at year-end or at the summer break the
• Have a clear strategy before making the customer will be closed for a holiday period,
call. ask for a post dated cheque or agree to
What are the objectives of a proactive call hold a current cheque that will only be
where feedback to the following is being input at the agreed date.
sought?
• Confirm receipt of invoice. 2.0 Telephone Credit Control
• Determine if any unknown query exists. 2.1 Introduction
• Agree a balance and date upon which The professional use of the telephone, as a
payment will be received. primary method of debt collection, establishes
Objectives: immediate liaison with the customer and
• To determine status of any unpaid invoices. ensures that the matter of payment cannot
• To provide details to resolve any unknown be ignored.
query. The personnel most able to expedite
• To obtain a commitment for payment by a payment must be determined and any
specific day. query preventing payment, identified and
• To obtain a commitment as to when an promptly answered. Used on a priority
invoice will be passed for payment. basis, with reference to the aged debtors
• To extract a commitment as to when new report and sorted into descending order of
queries will be responded to. balance outstanding, it is both economic
• To ensure that customers know that the and functional. It will provide a rapport
company will always be proactive when with the customer and a platform from
pursuing debts. which to demonstrate the efficiency of the
Contact the customer accounts function and to provide a compre-
• Ask questions in a professional and hensive service to all customers. Telephone
courteous manner. Offer help, but never contact should be used wherever possible,
argue with the customer. although it is appreciated that the use of fax
• Ask as many questions as needed, in order or email for certain customers can be
to obtain a satisfactory and clear answer. advantageous.
• Ensure that you get a satisfactory answer. Follow-up telephone calls are of vital
• Ensure that your contact has fully importance in maximising cash flow. The
understood the conversation, including timing of follow-up calls can generate an
any commitments made. incentive to pay on a basis that is acceptable
• Never be reluctant to ask for money. It is to both parties. The Credit Manager must
money your company it has earned. monitor the success of this strategy.
• If appropriate, request a manual cheque.
This is particularly applicable near month 2.2 Use of the telephone
end and at year-end or if the customer's (1) Be prepared
normal cheque processing is infrequent. Before dialling, the Credit Controller should
26
be familiar with all aspects of the customer's There are several programs on the
account and should know what to say market which monitor query resolution,
prior to making the call. Lack of confidence highlighting log-jams in the system and
or preparation will be transmitted to the indicating where common disputes need
contact and diminish the likelihood of additional training to curtail a repetition of
achieving the prime objective, which is the error.
obtaining full payment of the account
before the due date. (6) Close the call
Having agreed the balance, or part balance
(2) Contact the right person where possible if there is a query involved,
To prevent an unnecessary waste of time, it a commitment should be obtained to pay a
should be established that the person spoken specific amount to be received on a set date.
to is in a position to effect payment. In
some cases it is an advantage to obtain the 2.3 Commitment to pay
names of cheque signatories so that they Here the approach is vitally important and
may be contacted in cases of future delays. tactful persistence is essential. Common
reactions from customers of "I'll look into it
(3) Know the company for you" or "I will send you a cheque" should
To establish a rapport with the contact, the not be accepted without a definite promise
Credit person should know something of the completion of an investigation within
about the company. The contact's name, an agreed time scale, or a specific date for
title, location and authority should be despatch of a cheque.
requested and noted in the customer record In all probability, this will in itself ensure
details. These details are the basis for action on the part of the customer and if
future contact. not, certainly provides the basis for any
subsequent follow-up.
(4) Obtain an agreement Should a customer admit that he cannot
Balances should always be agreed with the pay the full amount, due to cash flow
customer where possible and the reasons problems and there is no reason to disbelieve
for any differences should be determined. his story, only accept an "on account"
A date upon which a payment will be payment as part of an agreed scheme for
expected to be received should also be repayment of the whole. This should be
agreed. within a specific time scale and with the
authority of the sales manager involved.
(5) Follow through queries Diary forward to check that the customer
Queries surfaced in telephone conversa- conforms to the agreement.
tions with customers should be referred to
the appropriate area for resolution and 2.4. Attitude to a customer
monitored by credit on a regular basis. It At all times Credit personnel, when using
is not necessarily the responsibility of the telephone, should observe the following:
credit to resolve queries discovered by the (1) Always politely listen to the customer's
department. answers to the questioning, without inter-
27

Cm
ruption. On no account should you argue 2.6. Diary

or show irritation. To ensure the required planned follow-up
(2) Do not discuss the details of the cus- of the initial contact, the use of Microsoft
tomer's account with anyone not involved Outlook Calendar as a diary is essential.
in the bought ledger function or who is not Reliance on memory is both unreliable and
a director of the company. You will not only imprecise.
be wasting your time and theirs but you may This allows each credit professional to
also be contravening Section 40 of the 1970 pre-determine his or her contact with the
Administration of Justice Act, introduced customer, allowing sufficient time for a
to prevent harassment of debtors. It is response, without permitting needless credit
unlawful to reveal a debtor's business to one being offered.
of his employees who is not in a position to
have the right to know. 2.7. Credit control documentation
(3) Always persuade, do not demand. Any 2.7.1 Daily telephone activity analysis
intention of further action as a consequence Where a new credit controller joins the
of non-payment should be fully explained to company or where there is a question over
the customer. the performance of an existing member of
(4) The use of empty threats is counter-pro- staff, an activity analysis should be used as
ductive to efficient cash management. a guide to the number of calls being made,
(5) All Credit staff are representatives of the values being promised and when values
your company and you should aim to be are expected to be settled. It also shows
both courteous and helpful at all times. the success or otherwise of follow-up calls
(6) It is the responsibility of the Credit func- and the number of calls being made.
tion to ensure conformity to the terms of This document is regarded very much
trading established by your company with as a monitoring document and would nor-
each customer. In accepting this responsibili- mally only be used at the commencement
ty, it is appreciated that, as not all customers of a project to identify any areas where
will pay to these terms, there will inevitably additional training is necessary. It could
be confrontations with recalcitrant customers. also be used to monitor progress at a later
The attitude of the credit department will stage, if it was felt that the number and
therefore depend very much on how success- effectiveness of calls are currently falling
ful the department is in achieving a reduction short of expectations.
in the values that fall overdue. 2.7.2 Debtor reporting
In order that an assessment can be made of
2.5. Prime call time the efficiency of the Credit department, reg-
Maximum results will be obtained if tele- ular monitoring must take place. Reporting
phone activity is geared to the times when should be made to senior management
the customer will be most receptive and regarding the current position of the debtor
available. Experience shows that these level each month so that action can be
times are: taken in cases where levels are thought to
9:15 AM to 12:00 Noon be unacceptable. It is therefore vital that the
2:00 PM to 4:30 PM reports accurately reflect what is driving
28
any changes in debtor levels. This is calculated by taking the opening

One of the most accepted methods of receivables balance, plus the current sales
reporting debtors is using the Average Days value, less the closing receivables balance
Sales Outstanding (DSO) calculation. There and dividing the result by the opening
are various methods of calculating this figure, receivables balance, plus current sales
the most common of which is the exhaustion value, less the current not yet due balance
method where the current sales and previous and the result multiplied by 100. The final
month's sales are deducted from the current percentage shows how close you are to the
receivable total until the value is exhausted. perfect position of having no overdue
The number of days involved can then be debts! The nearer to 100 per cent the more
calculated. The reporting should also efficient you are.
include the overdue DSO or delinquent DSO 2.7.2.2 Weighted average age of receivables
as well as the terms or best possible DSO. This must be a computer generated calcu-
This latter DSO is calculated by deducting lation due to the volume of calculations
the current sales and previous month's involved. There is a tendency in most busi-
sales from the current not yet due total until nesses to invoice a larger volume of sales at
the value is exhausted. The number of days the month-end resulting in a less than
can then be calculated. The resultant best smooth turnover during the month. Also at
possible DSO can be deducted from the total times there are high volume transactions
DSO to get the overdue or delinquent DSO. during the month which can cause peaks in
This is important, as it will indicate if an trading. By ageing each open invoice based
increase in the total DSO is due either to a upon its size and when it was raised,
deterioration in collection performance or to totalling the result and dividing by the total
an increase in sales to extended term cus- receivables balance, a comparison can be
tomers. Both are the responsibility of Credit made each month of the effect of late or
Management to report, but only the former large value invoices still remaining unpaid.
is the responsibility of CCredit to correct! 2.7.2.3 Comparative ageing
Also included in the report should be It is important to show senior management
the percentage of the total of the overdue the ageing of the receivables profile and
receivables balance related to the total of expressing the values as a percentage of
the outstanding receivables balance. the total receivable balance. There should
All figures can be averaged out over a be a definite clear reduction in values and
twelve-month moving average, to smooth percentages as the ageing progresses
out seasonal fluctuations such as January, including the final ageing column. Any
Easter, August and December, when it is increases must be explained.
known that both revenue and payment 2.7.2.4 Rollover analysis
receipts can be lower in value due to holidays This report is more for internal use and will
taken by customers, or seasonal selling indicate where the collection performance
peaks. needs to be strengthened. Charting how
Other reports that can be used if much by value has rolled over from current
thought necessary are: to one month overdue or one month overdue
2.7.2.1 Collection effectiveness index to two months overdue etc and expressing
29

Cm
the new amount as a percentage of the commit, based upon the risk criteria defined
previous month's value and graphing the with respect to business opportunities and
result, will indicate the performance in the possible losses and the financial stability of
department. each customer.
Graphs should be produced to indicate In some cases these undoubted limita-
trends in movement related to outstanding tions to business must be set to safeguard
balances in previous months and the largest single asset of the
to estimate the targets for future ... it should be company i.e. debtors, but at the
months. regarded as an same time the setting of such
2.7.3 Cash forecasting opportunity to levels should focus attention on
Cash targets both by individual
increase sales ... those customers where the full
collector and as a whole should potential to future business has
be calculated each month and used as a not been realised. The Credit department
daily measure against progress. Should a should therefore be aware of all customers
shortfall be noted, extra resources can be where the existing level is beyond the cur-
used to rectify the situation before the rent maximum trading position and report
month-end. Cash targets that are reason- this situation to Sales.
able should be set to motivate and to stretch All customers should be categorised by
staff to achieve improved results and to risk so that they can be identified as to
maintain momentum. whether they are high, medium or low risk
Actual staff results should be published and all new customers should be identified
within the department to induce a compet- for the first 12 months of trading so that
itive spirit amongst the credit staff. attention can be focused on maintaining a
Cash forecasts should be extrapolated closer watch on them than those who have
many months ahead and the results moni- a proven track record with the company.
tored. For annual budgetary purposes, the After the 12 month period these "new"
Credit Manager will be expected to provide customers can be re-categorised into high,
a cash flow forecast for the following year. medium, or low risk.
The investment level and risk criteria
3.0 Investment levels (credit limits) should be fully documented in a form suit-
Concerning the use of the word "limit", I able for guidance to Credit personnel and
am aware that this is seen by many to be other internal users and there should be a
more of a restriction on future sales, when procedure for regular reviewing of the data.
it should be regarded as an opportunity to Systems must be in place to identify
increase sales to those customers who are those customers who, with the existing
more risk free than others. I therefore outstanding balances plus any unfulfilled
advocate the use of the term "investment orders, are within a specified percentage of
level". the maximum investment level (say 90 per
Strict Investment Levels will be set for cent) and if necessary future orders should
each customer prior to any contract being not be accepted until a suitable payment is
drawn up that clearly reflect the level of made or the investment level is reviewed
investment to which the company will and amended.
30
I am not going to go into the detail here that ambiguities are eliminated.
of how investment levels are calculated for Signed contracts should be available to
each company as there are many good those departments within the company
books sold by the ICM bookshop *(see that will need access in the future to
below) on this subject. resolve disputes.
4.0 Sales ledger ... an efficient and Conclusion

It is essential in an efficient Credit effective Credit There will undoubtedly be addi-
department that the prime Management tional procedures that you will
records relating to each customer department is an want to add that are relevant to
are accurate and that dispatch
essential part of your own organisation, some I
notes, invoices/credit notes and, hope triggered by the procedures
where necessary, statements are the team mentioned earlier.
accurate and are delivered to the right per- No two businesses are the same and
son at the right time. My considered view priorities in one may not be priorities in
is that all these documents must be another. Having the procedures for your
addressed to the customer's bought ledger organisation clearly laid out and imple-
department and not, as I have seen in the mented will, I hope, induce a collective
cases of invoices and credit notes, thrust to maintaining a clear direction for
addressed to the department who has your department.
ordered the goods, who are liable to sit on The successful management of credit is
these documents unknown to the cus- only one link in the chain of a successful
tomer's finance area! Also the details of organisation and therefore an efficient and
payments received should be accurately effective Credit Management department is
transferred to the correct ledger accounts an essential part of the team that can put
on the day on which the records become your company ahead of your competitors.
available or the payment is received.
Where any error is found, the person The Author
responsible should be identified and given Paul M Stevenson can be
the responsibility to correct the error. contacted on 01442 875030 or by
All new customers should have the emailing p.g.steve@hotmail.com
terms of trading agreed and these terms o
written into a formal contract before trading
commences. The payment terms must be
ICM Booklist I N ST IT U
E
TE
TH
negotiated and agreed between the Sales

’S
For your free booklist

BO
TheOInstitu
O Boo
K S H te’s
P
Specialist ksh op
department and that of Credit. Any changes covering over 170 titles
books for
the Cred
it Professio
nal
to payment terms should be negotiated on credit management Booklist

2004-20
with the Sales and Credit departments and and wider financial topics, 05
Credit should ensure that the customer telephone the ICM’s

understands and accepts these terms. Bookshop on 01780
722901 or email Moving
It is important that the Credit department forward

with ICM
books@icm.org.uk
is involved in the drafting of contracts so
31
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Credit Policy Supplement

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Feb Supplement 05 5/1/05 2:55 pm Page 1

Includes templates for:

This supplement was issued

To help you implement a framework for your department

If this was business information,

this would be business information from Experian.

extraordinary use of information

Establishing a secure platform - an overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Purpose, operation and amendments . . . . . . . . .23

Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Telephone credit control . . . . . . . . . . . . . . . . .26

Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Investment levels (credit limits) . . . . . . . . . . . .30

Responsibilities . . . . . . . . . . . . . . . . . . . . . . . .10 Sales ledger . . . . . . . . . . . . . . . . . . . . . . . .31

Principles of operation . . . . . . . . . . . . . . . . . . .11 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . .31

CREDITmanagement is the Journal of the Institute of Credit Management

CREDITmanagement Editorial and Advertising contact details

T he granting of credit in trading has

Cm Credit Supplement Credit policy and procedure - overview

Credit policy and procedure - overview Credit Supplement

Cm Credit Supplement Credit policy and procedure - overview

and responsibilities available to the credit

raper Page 36 CREDITmanagement

should explain the responsibilities and

Debt Sale - market

objectives of the department and how

areas. Once drawn up, the policy should

be cleared by the Board of Directors and Editor &

Purpose positively at the assets of the company and

Cm Credit Supplement Credit policy

Credit policy Credit Supplement

receivable. they are the responsibility of the whole

Cm Credit Supplement Credit policy

procedures. their actions (or lack of actions) on other

Credit policy Credit Supplement

Cm Credit Supplement Credit policy

risk is perceived to be low. On no account should customers be

Credit policy Credit Supplement

Cm Credit Supplement Credit policy

Credit policy Credit Supplement

6. Legal action made both for bad and doubtful debts.

Cm Credit Supplement Credit policy

Credit policy Credit Supplement

customers on extended terms.This is clearly company. In this ever-changing technological

If this was business information,

this would be business information from Experian.

extraordinary use of information

L ate payment is one of those topical

Cm Credit Supplement Credit policy

Credit Management Procedures - index 2.4. Attitude to the customer

Cm Credit Supplement Credit procedure

Credit procedure Credit Supplement

1.5 Collection of debts should be diarised forward using, say,

Cm Credit Supplement Credit procedure

received by the agreed date, he/she can method of notification.

Credit procedure Credit Supplement

1.8 Maximising telephone effectiveness • If part of an invoice is under query, request

Cm Credit Supplement Credit procedure

Credit procedure Credit Supplement

ruption. On no account should you argue 2.6. Diary

Cm Credit Supplement Credit procedure

any changes in debtor levels. This is calculated by taking the opening

Credit procedure Credit Supplement

Cm Credit Supplement Credit procedure

4.0 Sales ledger ... an efficient and Conclusion