Credit policy and debt-collection processes are fundamental requirements to run a profitable business.
Knowing who to approve for credit, how much credit to extend and how to collect are key responsibilities of successful business ownership.
Unfortunately, many small and medium businesses overlook this important step. The consequences are well known: negative cash flow, unpaid bills and ultimately, bankruptcy.
A credit policy is a blueprint used by businesses to make the decision to grant credit to customers. It provides the guidelines and procedures to enable them to make an objective assessment of the credit worthiness of customers and avoid extending credit to customers who might not pay on time or might not pay at all.
Established credit policies provide the tools and internal controls that prevent businesses from having to spend time and resources chasing their own money.
The ultimate goal in deploying a credit policy is helping a business achieve sustainable long-term growth through the acquisition, retention and development of profitable customers by:
● Identifying and managing credit risk
● Improving the effectiveness of debt collections
● Maximizing cash flow, and
● Optimizing profits
Having a credit policy is critical to the success of any business, especially in today’s economy that faces one of the most difficult times since the Great Depression with record unemployment levels, tight credit and growing small business bankruptcies.
New business owners in general fail to recognize the importance to their success of credit management and debt collection and rely on “instinct” as a credit-decision tool. As a result, they often ignore critical early warning signs of problems and respond too late to save their businesses.
Deploying credit and debt-collection processes provides banks with an excellent demonstration of the presence of internal controls and risk management discipline, factors that are looked on favorably when requesting access to funds or capital needed for business expansion.
How a business manages and implements credit policies can have a direct impact on the health of its cash flow. Good credit management starts with the sale and concludes with the successful payment.
Cash flow is the lifeline that keeps a business running. Without it, a business is unable to pay its debts, meet payroll, pay suppliers, pay taxes and avoid bankruptcy. Established credit policies recognize that there is risk in every decision and provide the tools, processes and controls to mitigate these risks.
In almost all types of business-to-business transactions a business is expected to extend credit to close the sale, known as trade credit. When a business extends trade credit, it minimizes the cash outflow of its customers while absorbing all the risks, since trade credit is in essence an unsecured credit line.
Although trade credit is the norm in the business-to-business world, it is imperative that businesses communicate their policies up front: credit terms, payment incentives, prepayment requirements, penalties and escalation clauses for delinquent accounts.
For millions of Americans, owning a business has always been a cornerstone of the American dream. While it offers great rewards, starting and running a profitable business is challenging and requires multiple skills, especially a working knowledge of credit policies and debt collection.
Edgar Ortiz is president and CEO of Strategic Analytic Solutions, an Atlanta-based management consulting firm.
About the Author
Keep Reading
The Latest
Featured
