If a sales executive made the statement, “Our sales dropped because of the company’s restrictive credit terms and limits,” would you lift restrictions on the credit terms right away to boost sales? Just because the sales department is unhappy with the credit terms does not mean you should alter the terms immediately. You must make careful considerations while writing the credit terms, and you should analyze inputs from all stakeholders.
Problems faced by the three important stakeholders—that is, people from sales and marketing, finance, and logistics—usually affect a company’s credit function. While the sales team focuses on increasing sales through liberal credit terms, to reduce costs, logistics wants to streamline the number of vendors used. Simultaneously, finance wants to protect the accounts receivable investment and the cost of any potential borrowings in case collections decrease. Based on each stakeholder’s requirements, you need to develop a credit policy that addresses most of their issues and provides an acceptable compromise for all.
Inputs from stakeholders are important, as they enable you to become a part of the strategic planning process. You must carefully review the financial impacts of the credit decisions taken. If you offer credit too liberally without proper checks, you risk increased collections activity and potential bad debt loss. If credit is too strict and confined, your company’s current customer base could erode because customers may buy products from a competitor with more flexible credit terms. To avoid such issues, you must:
- Understand the importance of credit policies.
- Choose the right blend of risk analysis and collections efforts to formulate a sound credit policy for your company.
- Develop the procedures for implementing the credit policy in your company.
Understanding and addressing the issues of all stakeholders enables you to formulate a credit policy that allows action and adheres to your company’s short- and long-term goals and objectives.
Have you chosen the right blend of credit terms for your company? If a credit policy is not implemented properly, a company runs the risk of miscommunications among its customer base, its stakeholders, and the credit department as a whole. The Accenture Academy course Employing a Sound Credit Policy will help you gain an understanding of the importance and types of credit policies, recognize the process of formulating a credit policy and the factors affecting it, and identify the procedures for successfully implementing a credit policy in your company.